THE  INCOME  TAX  LAW  OF  1913 
EXPLAINED 


THE  INCOME  TAX  LAW 

OF  1913 
EXPLAINED 

WITH  THE  REGULATIONS  OF  THE  TREASURY 
DEPARTMENT  TO  OCTOBER  31,  1913 


BY 


GEORGE  F.  TUCKER 
i^ 

JOINT  AUTHOR  OF  "THE  FEDERAL  INCOME  TAX  OF 
1894  EXPLAINED" 


BOSTON 

LITTLE,  BROWN,  AND   COMPANY 
1913 


Copyright,  1913, 
BY  GEORGE  F.  TUCKEB. 


All  rights  reserved 


THE  UNIVERSITY  PRESS,   CAMBRIDGE,   U.S.A. 


PREFACE 

THE  design  is  to  present  the  provisions  of 
the  present  Federal  law  imposing  a  tax 
upon  incomes  with  explanatory  observations 
and  with  the  citation  of  rulings  and  decisions 
upon  former  acts.  Some  of  these  rulings  and 
decisions  may  not  now  be  followed.  It  is 
to  be  noted,  however,  that  most  of  the  provi- 
sions of  the  present  law  imposing  a  tax  upon 
the  incomes  of  corporations  are  identical  with 
those  of  the  act  of  Aug.  5,  1909,  which  imposed 
an  excise  tax.  Hence  many  of  the  orders  is- 
sued and  the  rulings  and  decisions  made  upon 
that  act  and  cited  hi  this  volume  will  probably 
be  followed  and  adopted. 

The  author  desires  particularly  to  acknowl- 
edge the  courtesy  of  the  Wall  Street  Journal 
in  permitting  him  to  quote  from  the  articles 
appearing  in  the  June,  July,  and  September 
issues  of  that  Journal,  from  the  pen  of  Mr.  B.  S. 
Orcutt,  and  to  suggest  to  taxpayers  the  pe- 
rusal of  those  articles  as  a  remarkably  clear 
and  practical  presentation  of  the  questions 
and  problems  involved. 

G.  F.  T. 

BOSTON,  Dec.  1,  1913. 

281320 


TABLE  OF  CONTENTS 

>    PAGE 

Preface v 

Table  of  Cases ix 

Introductory 1 

»  The  Normal  and  Additional  Income  Tax     .    .  5 

*  What  the  Net  Income  Includes 14 

^Deductions  —  Business  Expenses  —  Interest  — 

Taxes  —  Losses,  etc.  —  Exclusions   ...  35 
v  Deduction  of  $3,000  or  $4,000  —  Husband  and 

Wife 57 

Returns  —  Increase  of  Amounts    ......  58 

Remedies 72 

When  Assessments  shall  be  Made  and  Paid  — 

Additions  in  Case  of  Non-payment  ...  80 
Deduction  and  Payment  at  Source  of  Normal 

Tax 83 

Penalties  in  Case  of  Refusal  or  Neglect  to 
Make  Return  and  in  Case  of  Fraudulent 

Return 97 

,  Corporation   Tax  —  What    Corporations    are 

Exempt 101 

Net  Income  of  Domestic  and  Foreign  Cor- 
porations—  Deductions 116 

Computation     of     Tax  —  Returns  —  Assess- 
ments and  Notice 129 

Instructions  as  to  Returns 142 

Class  of  Corporations,  etc.,  Subject  to  Tax.    .  145 

Inventories,  Accounts,  etc 153 

Deductions,  Expenses,  etc 154 


V1U  TABLE   OF   CONTENTS 

PAGE 

Depreciation 161 

Publicity 164 

Depreciation  in  Minerals,  Oils,  etc 164 

Assessments 173 

Meaning  of  "State  "or  "  United  States"     .    .     183 
Penalty  for  Revenue  Officers  Disclosing  Op- 
erations, etc.,  of  Manufacturers,  Income 
Returns,   etc.    Canvass  of  Districts  for 
Objects  of  Taxation  —  Annual  Returns  of 
Persons,    etc.,    Liable    to    Tax  —  When 
Collector  or  Deputy  May  Make  Return 
—  Notice  to  Make  Return  —  Production 
of  Books  of  Account  —  Penalties  ....     184 
Receipt  of  Collector  of  Internal  Revenue  for 

Taxes 198 

Jurisdiction   of   the    United    States    District 

Courts 199 

Certain  Administrative,  etc.,  Laws  to  Apply  .     200 
Porto  Rico  and  the  Philippine  Islands  ....     200 

Laws  to  Remain  in  Force 201 

Construction   in   case   of   Invalidity   of   any 

Clause,  etc 204 

Recent  Points 205 

Treasury  Regulations  as  to  Collection  at  the 

Source  on  Bonds,  etc 207 

Further  Regulations  as  to  Collection  at  the 

Source 238 

Index  .  255 


TABLE  OF  CASES  CITED 

[REFERENCES  ABE  TO  PAGES] 

Abrast  Realty  Co.  v.  Maxwell 110 

Bank  for  Savings  v.  Collector 21 

Barnes  v.  Railroad 26 

Boyd  v.  United  States 194 

Caldero.  Bull 99 

Chesebrough  v.  United  States 77 

Christie  St.  Commission  Co.  v.  United  States     ....  77 

Collector  v.  Day 20 

t;.Hubbard 27,30,78 

De  Bary  v.  Dunne 76 

Doll  w.Evans 193 

Dupasseur  v.  United  States 79 

Edison  Electric  Co.  v.  United  States 75 

Eidman  v.  Martinez 1 

Eliot  v.  Freeman 107,  152 

Emery  Realty  Co.  v.  United  States 108,  112 

Ex  parte  Medley 99 

Fair-bank  v.  United  States 195 

Flint  v.  Stone  Tracy  Co 106 

Gager  v.  Prout 100 

General  Inspection  Co.  v.  United  States 114, 178 

Gray  v.  Darlington 19 

Hendy  v.  Soule 78 

Interstate  Commerce  Commission  v.  Brimson     ....  194 

Johnson  v.  Herold  75 


X  TABLE   OF   CASES   CITED 

[REFERENCES  ABE  TO  PAGES] 

PAGE 

Kille  v.  Reading  Iron  Works 99 

Kings  Co.  Sav.  Inst.  v.  Blair 75 

Koshkonong  v.  Burton 99 

Landram  y.  United  States 193 

Lawless  v.  Sullivan 53 

Little  v.  Little 55 

Locke  v.  New  Orleans 99 

Mackey  v.  Holmes 100 

Magee  v.  Denton 32,  68,  82 

MandeU  v.  Pierce 14,  71 

Massachusetts  v.  Western  Union  Tel.  Co 82 

McCoach  v.  Minehill  R.  Co 109 

Merchants  Insurance  Co.  v.  McCartney  ....      22,  28,  32 

Merck  v.  Treat 76 

Michigan  Central  R.  Co.  v.  Slack 100 

Mutual  Benefit  Ins.  Co.  v.  Herold     ....        112,  127,  128 

Nixon  v.  United  States 78 

Pacific  Bldg.  &  Loan  Ass'n  v.  Hartson 114 

Parkview  Bldg.  Ass'n.  v  Herold 112,  115 

Partridge  v.  Mallandaine 21 

Patton  v.  Brady 75 

Pennsylvania  Steel  Co.  v.  New  York  City  R.  Co.      .    .     Ill 
Pollock  v.  Farmers'  Loan  Co 2 

ReChadwick 79 

Lippman 193 

Phillips 193 

Strouse 193 

Rice  v.  United  States 1 

Ryan  v.  State 100 

Schwarzchild  Co.  v.  Rucker 76 

Snyder  v.  Marks 77 

State  v.  Jersey  City 100 

Steamship  Co.  v.  Joliffe 99 

Stewart  v.  Barnes 77,  79 

Stockdale  t;.  Ins.  Companies 26,  32,  99 

Stotesbury  v.  United  States 79 


TABLE   OF   CASES   CITED  XI 

[REFERENCES  ABE  TO  PAGES] 

PAGE 

Stratton's  Independence  v.  Howbert     ...        112,  127,  128 

Straus  v.  Abrast  Realty  Co Ill 

Sturges  v.  Carter 100 

Sybrandt  v.  United  States 79 

United  States  v.  Aconn  Roofing  Co 143,  145,  181 

v.  Brooklyn  City  &  N.  R.  Co 100 

v.  Central  Nat.  Bank 27 

v.  Cutting 21 

v.  Davis 78 

v.  Dollar  Savings  Bank 82 

0.  Erie  Railway  Co 28 

v.  Fisk 21 

v.  Fordyce 193 

v.  Frerichs 78 

v.  Frost      33,  52 

v.  General  Inspection  Co 114,  144 

v.  Indianapolis  Railroad  Co 26 

v.  Kaufman 76 

v.  Little  Miami  R.  Co 79 

t;.  Louisville  R.  Co 27 

0.  Mayer 52 

v.  Military  Const.  Co 143 

v.  New  York  Guaranty  Co 100 

v.  New  York  Steamship  Co 75 

v.  1960  Bags  of  Coffee 99 

v.  Nipissing  Mines  Co 108,  172 

v.  Pacific  Railroad 79,  82 

v.  Railroad  Co 20 

v.  Savings  Bank 75 

v.  Schillinger 19 

v.  Simons 34 

v.  64  Barrels  of  Spirits 99 

v.  Smith 32 

v.  Stowell 1 

v.  The  Mars     99 

Western  Express  Co.  v.  United  States 79 

Wilcox  v.  County  Commissioners 18 

Wright  v.  Blakeslee 75 

Zonne  v.  Minneapolis  Syndicate 107 


THE   INCOME   TAX   LAW 
OF  1913,   EXPLAINED 

INTRODUCTORY 

Income  taxes  belong  to  the  Bureau  of  In- 
ternal Revenue. 

Revenue  statutes,  being  neither  remedial 
nor  founded  upon  any  permanent  public  policy, 
are  to  be  construed  in  favor  of  the  taxpayer, 
and  most  strongly  against  the  government. 
Eidman  v.  Martinez,  184  U.  S.  578,  583;  Rice  v. 
United  States,  53  Fed.  Rep.  910.  Statutes  re- 
lating to  frauds  upon  the  revenue,  though  im- 
posing penalties,  are  not  construed  strictly  in 
the  defendant's  favor,  like  penal  laws,  but  in 
such  manner  as  to  carry  out  the  intent  of  the 
legislature.  United  States  v.  Stowell,  133  U. 
S.  1,  12. 

The  first  Federal  income  tax  was  that  con- 
tained in  the  Revenue  Law  of  August  6,  1861, 
c.  45  (12  St.  at  L.  309).  This  act  was  never 
put  in  force  and  was  repealed  and  reenacted 
by  the  act  of  July  1,  1862,  c.  119  (12  St.  at 
L.  473),  which  was  amended  by  the  act  of 
March  3,  1863,  c.  74  (12  St.  at  L.  713).  The 


51 /:  •/:  ;•  ;;: :    :  INTRODUCTORY 

next  act  was  that  of  June  30,  1864,  c.  173, 
§§  116-123  (13  St.  at  L.  223,  281).  Certain 
sections  of  this  act  were  amended  by  the  St. 
of  March  3,  1865,  c.  78  (13  St.  at  L.  479).  It 
was  further  amended  by  the  act  of  July  13, 
1866,  c.  184  (14  St.  at  L.  137).  The  next  act 
was  that  of  March  2,  1867,  c.  169  (14  St.  at 
L.  477).  The  act  of  July  14,  1870,  c.  255  (16 
St.  at  L.  257)  limited  the  tax  to  the  years  1870 
and  1871,  and  no  longer.  The  next  act  was 
that  of  August  27,  1894,  c.  349  (28  St.  at  L. 
509,  553),  which  was  declared  unconstitu- 
tional in  Pollock  v.  Farmers'  Loan  Co.,  157 
U.  S.  429;  158  U.  S.  601. 

Besides  the  decisions  of  the  courts  and  the 
rulings  of  the  Internal  Revenue  officers,  the 
books  which  have  been  chiefly  consulted  in 
the  preparation  of  this  manual  are  — 

Seligman,  The  Income  Tax  (1911).  This  is 
an  exhaustive  treatise,  giving  the  history  of 
income  tax  laws  throughout  the  world  and 
ably  dealing  with  the  constitutional  problems 
which  have  arisen  in  the  United  States,  as  well 
as  with  questions  of  administration,  etc. 

Kennan,  Income  Taxation  (1910).  This 
gives  a  valuable  summary  of  method  and  re- 
sults in  various  countries  and  contains  much 
practical  information. 

Bump,  Internal  Revenue  Statutes,  now  in 


INTRODUCTORY  6 

force  with  Notes  referring  to  all  Decisions  of 
the  Courts  and  Departmental  Rulings,  Cir- 
culars and  Instructions,  reported  to  October 
1,  1870. 

Foster  &  Abbot,  A  Treatise  on  the  Federal 
Income  Tax  under  the  Act  of  1894  (1895). 
This  work  as  stated  in  the  preface  "is  to  fur- 
nish a  practical  treatise  for  the  benefit  of 
lawyers,  government  officials,  and  laymen,  on 
the  interpretation  of  the  new  law  imposing  an 
income  tax." 

The  Internal  Revenue  Record  and  Customs 
Journal. 

Boutwell,  A  Manual  of  the  Direct  and  Ex- 
cise Tax  System  of  the  United  States  (1863). 

Boutwell,  A  Manual  of  the  Direct  and  Ex- 
cise Tax  System  of  the  United  States  (1864). 

The  United  States  Revenue  Journal. 

United  States  Treasury  Decisions. 

Articles  in  the  Wall  Street  Journal  in  issues 
of  June,  July,  and  September,  1913  —  seven- 
teen in  all,  their  object  being  to  point  out  the 
defects  of  the  bill  before  Congress. 

Speer,  Federal  Income  Tax  Law,  with  an 
Analysis  of  the  Act  and  Explanatory  Notes 
(1913). 

Those  of  the  above  volumes  hereinafter  re- 
ferred to  will  be  cited  in  the  following  abbre- 
viated forms: 


4  INTRODUCTORY 

Seligman. 
Bump. 

Foster  &  Abbot. 
Int.  Rev.  Rec. 
Bout.  (1863). 
Bout.  (1864). 
U.  S.  Rev.  Journ. 
Treas.  Decis. 
Wall  St.  Journ. 
Speer. 

The  history  of  income  taxes  in  England  and 
other  European  countries  is  ably  treated  in 
Seligman,  57-355.  For  State  income  taxes, 
see  Ibid.,  388  et  seq. 


The  following  is  the  Amendment  to  the  Con- 
stitution of  the  United  States,  by  virtue  of 
which  the  present  income  tax  law  was  passed: 

ARTICLE  XVI 

The  Congress  shall  have  power  to  lay 
and  collect  taxes  on  incomes,  from  what- 
ever source  derived,  without  apportion- 
ment among  the  several  States,  and  without 
regard  to  any  census  or  enumeration. 

The  present  law,  approved  October  3,  1913, 
is  Section  II  of  an  act  "To  reduce  tariff  duties 
and  to  provide  revenue  for  the  Government, 
and  for  other  purposes,"  and  is,  with  notes 
appended,  as  follows: 

THE   NORMAL   AND   ADDITIONAL    INCOME 
TAX 

A.  Subdivision  I.  That  there  shall  be 
levied,  assessed,  collected,  and  paid  an- 
nually upon  the  entire  net  income  arising 
or  accruing  from  all  sources  in  the  preceding 


6  INCOME   TAX   LAW   EXPLAINED 

calendar  year  to  every  citizen  of  the  United 
States,  whether  residing  at  home  or  abroad, 
and  to  every  person  residing  in  the  United 
States,  though  not  a  citizen  thereof,  a 
tax  of  one  per  centum  per  annum  upon 
such  income,  except  as  hereinafter  pro- 
vided; and  a  like  tax  shall  be  assessed, 
levied,  collected,  and  paid  annually  upon 
the  entire  net  income  from  all  property 
owned  and  of  every  business,  trade,  or 
profession  carried  on  in  the  United  States 
by  persons  residing  elsewhere. 

Subdivision  II.  In  addition  to  the  in- 
come tax  provided  under  this  section  (herein 
referred  to  as  the  normal  income  tax)  there 
shall  be  levied,  assessed,  and  collected 
upon  the  net  income  of  every  individual 
an  additional  income  tax  (herein  referred 
to  as  the  additional  tax)  of  one  per  cent, 
per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $20,000  and 
does  not  exceed  $50,000,  and  two  per 
cent,  per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $50,000  and 


NORMAL   AND   ADDITIONAL   TAX  7 

does  not  exceed  $75,000,  three  per  cent, 
per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $75,000  and 
does  not  exceed  $100,000,  four  per  cent,  per 
annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $100,000  and  does 
not  exceed  $250,000,  five  per  cent,  per 
annum  upon  the  amount  by  which  the 
total  net  income  exceeds  $250,000  and  does 
not  exceed  $500,000,  and  six  per  cent, 
per  annum  upon  the  amount  by  which 
the  total  net  income  exceeds  $500,000.  All 
the  provisions  of  this  section  relating 
to  individuals  who  are  to  be  chargeable 
with  the  normal  income  tax,  so  far  as 
they  are  applicable,  and  are  not  incon- 
sistent with  this  subdivision  of  paragraph 
A,  shall  apply  to  the  levy,  assessment,  and 
collection  of  the  additional  tax  imposed 
under  this  section.  Every  person  subject 
to  this  additional  tax  shall,  for  the  purpose 
of  its  assessment  and  collection,  make 
a  personal  return  of  his  total  net  income 
from  all  sources,  corporate  or  otherwise, 


8  INCOME   TAX   LAW   EXPLAINED 

for  the  preceding  calendar  year  under 
rules  and  regulations  to  be  prescribed  by 
the  Commissioner  of  Internal  Revenue 
and  approved  by  the  Secretary  of  the 
Treasury.  For  the  purpose  of  this  addi- 
tional tax  the  taxable  income  of  any  in- 
dividual shall  embrace  the  share  to  which 
he  would  be  entitled  of  the  gains  and  profits, 
if  divided  or  distributed,  whether  divided 
or  distributed  or  not,  of  all  corporations, 
joint  stock  companies  or  associations,  how- 
ever created  or  organized,  formed  or  fraud- 
ulently availed  of  for  the  purpose  of  pre- 
venting the  imposition  of  such  tax  through 
the  medium  of  permitting  such  gains  and 
profits  to  accumulate  instead  of  being 
divided  or  distributed;  and  the  fact  that 
any  such  corporation,  joint  stock  company, 
or  association,  is  a  mere  holding  company, 
or  that  the  gains  and  profits  are  permitted 
to  accumulate  beyond  the  reasonable  needs 
of  the  business  shall  be  prima  facie  evi- 
dence of  a  fraudulent  purpose  to  escape 
such  tax;  but  the  fact  that  the  gains  and 


NORMAL  AND   ADDITIONAL   TAX  9 

profits  are  in  any  case  permitted  to  ac- 
cumulate and  become  surplus  shall  not 
be  construed  as  evidence  of  a  purpose  to 
escape  the  said  tax  in  such  case  unless  the 
Secretary  of  the  Treasury  shall  certify 
that  in  his  opinion  such  accumulation  is 
unreasonable  for  the  purposes  of  the  busi- 
ness. When  requested  by  the  Commis- 
sioner of  Internal  Revenue,  or  any  district 
collector  of  internal  revenue,  such  corpora- 
tion, joint  stock  company,  or  association 
shall  forward  to  him  a  correct  statement 
of  such  profits  and  the  names  of  the  individ- 
uals who  would  be  entitled  to  the  same 
if  distributed. 


Subdivision  I  is  quite  similar  in  its  pro- 
visions to  previous  acts.  The  provisions  of 
Subdivision  II  relative  .to  an  additional  in- 
come tax  are  new. 

The  writer  in  the  Wall  St.  Journ.  in  Art.  XV, 
in  speaking  of  the  changes  made  by  the  Senate 
caucus  in  the  original  bill,  says  that  the  object 
of  the  change  levying  a  tax  of  1  per  centum  on 
all  net  income  "  except  as  hereinafter  pro- 


10  INCOME   TAX   LAW   EXPLAINED 

vided,"  instead  of  income  "over  and  above" 
a  certain  amount,  manifestly  is  to  meet  the 
Journal's  criticism  that,  although  the  bill  levied 
no  tax  on  incomes  under  the  certain  amount, 
"it  provided  for  the  collection  of  a  tax  on  in- 
comes no  matter  how  small,  if  such  incomes 
were  derived  from  interest  on  bonds."  Fur- 
ther, that  such  a  proceeding  was  not  only 
unjust  to  those  receiving  incomes  below  the 
taxable  limit,  but  "was  probably  unconstitu- 
tional inasmuch  as  it  required  a  corporation  to 
withhold  or  pay,  as  the  case  might  be,  from  or 
on  behalf  of  its  creditors,  moneys  to  which 
the  creditors  were  entitled  or  which  the  cor- 
poration was  not  obligated  to  pay  except 
under  threat  of  even  larger  penalty."  It  was 
also  pointed  out  "that  no  provision  was  made 
for  the  disposal  of  the  moneys  withheld  on 
incomes  of  less  than"  a  certain  amount.  This 
criticism  has  been  met  by  insertion  of  the 
words,  "And  paid  to  the  Government"  at  the 
end  of  the  clause  authorizing  the  deduction. 
See  p.  87. 

"The  result  of  these  two  changes  is  that  a 
tax  is  levied  on  all  incomes  unless  the  re- 
cipient can  prove  that  he  is  exempt,  which,  in 
the  case  of  a  person  who  derives  even  $10  a 
year  from  bond  interest,  seems  impossible." 
See  Arts.  II,  XI,  XII,  XVI. 


NORMAL  AND   ADDITIONAL  TAX  11 

The  writer  in  the  Wall  St.  Journ.  further 
states  in  Art.  XVII  that  he  pointed  out  in  a 
former  article  that  the  provisions  as  to  surtax 
and  deduction  for  dividends  received  from 
corporations  which  had  paid  the  normal  tax 
of  1  per  centum  on  net  income  before  the  dis- 
tribution of  the  dividend  would  leave  free  of 
surtax  the  $600,000  of  dividends  received  an- 
nually by  the  estate  of  A.  B.  (used  as  an  ex- 
ample), and  also  made  it  possible  for  A.  B. 
to  incorporate  his  other  investments  and 
thereby  avoid  the  payment  of  the  surtax  on 
all  his  income  by  paying  it  to  himself  in  the 
form  of  dividends  from  A.  B.,  Inc.,  such  divi- 
dends not  being  taxable  in  the  hands  of  the 
individual. 

He  further  states  that  an  effort  was  made  to 
remedy  the  defect  by  inserting  (see  B)  the 
words  "for  the  purpose  of  the  normal  tax," 
so  that  the  bill  thus  read:  "That  in  comput- 
ing net  income  for  the  purpose  of  the  normal 
tax  there  shall  be  allowed  as  deductions,"  etc. 
The  writer  then  refers  to  the  clause  added  to 
Subdivision  II,  which  begins  with  the  words, 
"For  the  purpose  of  this  additional  tax,  the 
taxable  income,  etc.,"  and  says  that  this 
"narrows  the  attempt  to  collect  a  tax  on  un- 
distributed earnings  to  companies  formed  or 
fraudulently  availed  of  for  the  purpose  of  pre- 


12  INCOME   TAX   LAW   EXPLAINED 

venting  the  imposition  of  such  tax,  but  it  in 
no  way  strengthens  the  act  as  to  the  collec- 
tion of  a  surtax  on  incomes  derived  from  the 
enormous  total  of  dividends  from  legitimate 
corporations  not  used  for  fraudulent  purposes. 
The  anomalous  situation  is  now  presented  of 
a  measure  still  leaving  open  the  loophole  for 
the  evasion  of  taxation  contained  in  the  orig- 
inal draft  and  at  the  same  time  throwing  on 
the  Secretary  of  the  Treasury  the  responsi- 
bility and  authority  to  decide  whether  or  not 
a  corporation  is  fraudulent  and  whether  it 
permits  its  gains  and  profits  to  accumulate 
as  surplus  beyond  the  reasonable  needs  of 
business. 

"It  would  be  difficult  to  conceive  a  more 
drastic  power  or  a  more  weighty  responsi- 
bility than  for  one  man  to  be  charged  with  the 
duty  of  deciding  which  of  the  thousands  of 
corporations  in  this  country  are  fraudulent  or 
used  for  fraudulent  purposes,  and  what  are 
then-  legitimate  business  requirements  in  the 
way  of  surplus." 

Only  the  individual  is  subject  to  the  addi- 
tional tax,  and,  when  he  pays  the  normal  tax 
(it  not  being  paid  for  him  at  the  source)  the 
additional  tax  will  be  assessed  against  him  and 
collected  at  the  same  time  and  in  the  same 
manner.  Both  taxes  may  be  easily  figured 


NORMAL  AND  ADDITIONAL  TAX  13 

out.  A  convenient  illustration  is  given  in 
Speer,  19. 

The  instructions  under  the  old  acts  were 
that  residents  should  make  return  in  the  dis- 
trict where  they  resided  at  the  time  of  making 
return,  residence  being  that  during  the  year 
for  which  income  was  derived;  and  if  any  per- 
son resided  abroad,  his  return  was  to  be  made 
in  the  district  where  he  last  resided.  7  Int. 
Rev.  Rec.  59.  See  Bump,  284. 

The  place  where  a  person  voted,  or  was  en- 
titled to  vote,  was  formerly  held  to  be  his 
residence,  and,  if  not  a  voter,  the  place  where 
the  tax  on  personal  property  was  paid.  Bout. 
(1863)  273. 

The  wife  of  an  alien  was  held  to  be  an  alien, 
though  a  citizen  before  marriage.  If  she  re- 
sided abroad,  the  profits  and  income  from 
stock,  etc.,  held  by  a  trustee  here  were  not 
to  be  returned;  if  she  resided  here,  she  was 
liable  to  the  tax  imposed  upon  every  citizen 
residing  here.  6  Int.  Rev.  Rec.  66.  See  Bump, 
284. 

It  was  held  that  an  alien  residing  here 
was  entitled  to  the  same  exemption  as  a 
native-born  or  naturalized  citizen.  6  Int.  Rev. 
Rec.  18. 

It  was  held  that  income  from  personalty 
held  by  a  trustee  for  persons  not  citizens  and 


14  INCOME   TAX  LAW  EXPLAINED 

not  residing  here  was  not  taxable.  1  Int.  Rev. 
Rec.  171. 

Income  from  an  inherited  estate  in  a  foreign 
country  of  one  who  had  become  a  citizen  there 
in  order  to  receive  the  estate  was  held  to  be 
taxable.  3  Int.  Rev.  Rec.  140. 

Where  the  gains  of  an  association  were  its 
sole  property,  and  not  divisible  among  its 
members,  the  association  was  held  to  be  a 
person  within  the  meaning  of  the  law,  and  re- 
quired to  make  a  return.  10  Int.  Rev.  Rec. 
39. 

Where  a  person  died  before  the  end  of  the 
income  year,  the  gains,  income,  etc.,  during 
that  portion  of  the  year  he  was  in  life  were 
held  subject  to  taxation  as  income.  Mandell 
v.  Pierce,  3  Cliff.  134.  See  14  Int.  Rev.  Rec. 
91;  Bump.  284. 

Cases  relative  to  residing  and  doing  business 
in  the  United  States  may  be  found  in  Foster 
&  Abbot,  98-101.  English  decisions  as  to 
residence  are  given  in  DowelPs  Income  Tax 
Laws  (7th  ed.),  448-453. 

WHAT  THE  NET  INCOME  INCLUDES 

B.  That,  subject  only  to  such  exemp- 
tions and  deductions  as  are  hereinafter 
allowed,  the  net  income  of  a  taxable 


WHAT  IS  NET  INCOME  15 

person  shall  include  gains,  profits,  and  in- 
come derived  from  salaries,  wages,  or  com- 
pensation for  personal  service  of  whatever 
kind  and  in  whatever  form  paid,  or  from 
professions,  vocations,  businesses,  trade, 
commerce,  or  sales,  or  dealings  in  property, 
whether  real  or  personal,  growing  out  of  the 
ownership  or  use  of  or  interest  in  real  or 
personal  property,  also  from  interest,  rent, 
dividends,  securities,  or  the  transaction 
of  any  lawful  business  carried  on  for  gain 
or  profit,  or  gains  or  profits  and  income 
derived  from  any  source  whatever,  including 
the  income  from  but  not  the  value  of  pro- 
perty acquired  by  gift,  bequest,  devise,  or 
descent:  Provided,  That  the  proceeds  of 
life  insurance  policies  paid  upon  the  death  of 
the  person  insured  or  payments  made  by 
or  credited  to  the  insured  on  life  insurance, 
endowment,  or  annuity  contracts,  upon  the 
return  thereof  to  the  insured  at  the  maturity 
of  the  term  mentioned  in  the  contract, 
or  upon  surrender  of  contract,  shall  not 
be  included  as  income. 


16  INCOME   TAX   LAW   EXPLAINED 

The  design  of  this  paragraph  is  undoubtedly 
to  cover  about  all  the  sources  of  income  re- 
ferred to  in  previous  acts,  yet  the  differences  in 
phraseology  are  marked.  The  more  important 
may  be  mentioned.  In  previous  acts  are  the 
words  "  all  income  derived  from  interest  upon 
notes,  bonds,  and  other  securities,"  which  are 
followed  in  the  act  of  1894  by  the  words  "  ex- 
cept such  bonds  of  the  United  States  the  princi- 
pal and  interest  of  which  are  by  the  law  of  their 
issuance  exempt  from  all  Federal  taxation." 

Other  provisions  in  the  old  acts  appear  to 
be  broader  as  "other  forms  of  indebtedness 
bearing  interest,  whether  paid  or  not,  if  good 
and  collectible,  less  the  interest  which  has 
become  due  from  said  person  or  which  has 
been  paid  by  him  during  the  year;  the  amount 
of  all  premiums  on  bonds,  notes,  or  coupons; 
the  amount  of  sales"  of  enumerated  produce 
being  the  growth  or  produce  of  the  estate  of 
such  person,  "less  the  amount  expended  in 
the  purchase  or  production  of  said  stock  or 
produce,  and  not  including  any  part  thereof 
consumed  directly  by  the  family;  money  and 
the  value  of  all  personal  property  acquired  by 
gift  or  inheritance." 

The  present  act  says  "including  the  income 
from  but  not  the  value  of  property  acquired 
by  gift,  bequest,  devise,  or  descent." 


WHAT  IS  NET  INCOME  17 

The  general  clause  as  to  "  gains  or  profits 
and  income  derived  from  any  source  what- 
ever" appears  in  preceding  acts.  After  the 
word  " whatever"  in  the  act  of  1867  is  the  fol- 
lowing "  except  the  rental  value  of  any  home- 
stead used  or  occupied  by  any  person  or  by 
his  family  in  his  own  right  or  in  the  right  of 
his  wife;  and  the  share  of  any  person  of  the 
gains  and  profits  of  all  companies,  whether 
incorporated  or  partnership,  who  would  be 
entitled  to  the  same,  if  divided,  whether  di- 
vided or  otherwise,  except  the  amount  of 
income  received  from  institutions  or  corpora- 
tions whose  officers,  as  required  by  law,  with- 
hold a  per  centum  of  the  dividends  made  by 
such  institutions,  and  pay  the  same  to  the 
officer  authorized  to  receive  the  same;  and  ex- 
cept that  portion  of  the  salary  or  pay  received." 
And  in  the  act  of  1894,  "  except  that  portion 
of  the  salary,  compensation,  or  pay  received 
for  services  in  the  civil,  military,  naval,  or 
other  service  of  the  United  States,  including 
Senators,  Representatives,  and  Delegates  in 
Congress,  from  which  the  tax  has  been  de- 
ducted, and  except  that  portion  of  any  salary 
upon  which  the  employer  is  required  by  law 
to  withhold,  and  does  withhold,  the  tax  and 
pays  the  same  to  the  officer  authorized  to  re- 
ceive it." 


18  INCOME   TAX   LAW  EXPLAINED 

The  writer  in  the  Wall  St.  Journ.  in  Art. 
XV  says,  "In  the  matter  of  life  insurance,  the 
Senate  Bill  has  accepted  the  amendment  sug- 
gested in  the  Wall  Street  Journal  exempting 
from  tax  moneys  received  by  the  insurer  upon 
surrender  of  the  contract,  as  well  as  upon  its 
maturity."  See  Art.  IX. 

The  income  from  a  "business"  is  different 
from  that  from  a  "profession,  trade,  or  em- 
ployment." The  income  from  a  business  "is 
the  net  result  of  many  combined  influences: 
the  use  of  the  capital  invested;  the  personal 
labor  and  services  of  the  members  of  the  firm; 
the  skill  and  ability  with  which  they  lay  in, 
or  from  time  to  time  renew,  their  stock;  the 
carefulness  and  good  judgment  with  which 
they  sell  and  give  credit;  and  the  foresight  and 
address  with  which  they  hold  themselves  pre- 
pared for  the  fluctuations  and  contingencies 
affecting  the  general  commerce  and  business 
of  the  country.  To  express  it  in  a  more  sum- 
mary and  comprehensive  form,  it  is  the  crea- 
tion of  capital,  industry,  and  skill."  Wilcox 
t;.  County  Com'rs,  103  Mass.  544,  546.  "The 
words  in  this  statute  [1894]  must  be  con- 
strued in  connection  with  those  to  which  it  is 
joined,  namely,  gains  and  profits;  and  it  is 
evidently  the  intention,  as  a  general  rule,  to 
tax  only  the  profits  of  the  taxpayer,  not  his 


WHAT  IS  NET   INCOME  19 

whole  revenue."  Foster  &  Abbot,  116.  Under 
the  old  law  it  was  held  in  1872,  in  Gray  v.  Dar- 
lington, 15  Wall.  63,  66,  that  "the  mere  fact 
that  property  has  advanced  in  value  between 
the  date  of  its  acquisition  and  sale  does  not 
authorize  the  imposition  of  the  tax  on  the 
amount  of  the  advance.  Mere  advance  in 
value  in  no  sense  constitutes  the  gains,  profits, 
or  income  specified  by  the  statute.  It  con- 
stitutes and  can  be  treated  merely  as  increase 
of  capital." 

Under  the  act  of  1870,  which  imposed  a  tax 
on  gains,  profits,  and  income  for  1871,  and  no 
longer,  the  amount  of  a  promissory  note  taken 
in  1871,  on  the  sale  in  that  year  of  a  patent 
right,  but  not  due  until  some  tirne  in  1872, 
and  paid  in  that  year,  was  not  taxable  as  in- 
come for  1871.  United  States  v.  Schillinger, 
14  Blatch.  71. 

The  tax  under  the  old  law  was  assessed  upon 
the  income  of  individuals,  and  not  upon  firms. 
Bout.  (1863)  275.  See  4  Int.  Rev.  Rec.  46. 

Salaries ,  wages,  or  compensation  for  personal 

service  of  whatever  kind  and  in  whatever  form  paid. 

It  was  held  under  the  old  acts  — 

That  marriage  fees  of  and  gifts  to  a  pastor 

were  returnable  when  the  gifts  were  in  the 

nature  of  compensation  for  services,  whether 


20  INCOME   TAX   LAW   EXPLAINED 

in  accordance  with  an  understanding  at  the 
settlement  or  an  annual  custom.  7  Int.  Rev. 
Rec.  59.  But  see  above  as  to  the  income  from 
gifts. 

That  where  the  earnings  of  a  minor  were 
under  the  control  of  the  father  they  were  to 
be  included  in  his  income;  if  entirely  free  from 
his  control,  the  assessment  was  to  be  separate. 
1  Int.  Rev.  Rec.  181.  And  if  the  taxpayer  had 
a  minor  child  in  the  service  of  the  government 
receiving  a  salary,  the  parent  should  include 
in  his  return  so  much  of  the  salary  as  was  not 
subject  to  a  salary  tax.  7  Int.  Rev.  Rec.  59. 
A  ruling  on  the  emancipation  of  a  child  is 
given  in  11  Int.  Rev.  Rec.  122. 

That  salaries,  except  where  specially  pro- 
vided for  by  statute,  were  income  from  busi- 
ness. 3  Int.  Rev.  Rec.  188.  Formerly  the 
salary  of  a  judge  of  a  State  court  was  held  not 
liable.  Collector  v.  Day,  11  Wall.  113;  3  Cliff. 
376.  So  formerly  the  revenues  of  a  State, 
and  also  the  revenues  of  municipal  corpora- 
tions created  for  the  purpose  of  exercising 
within  a  limited  sphere  the  governmental 
powers  of  the  State,  so  far  as  the  latter  revenues 
were  municipal  in  their  nature,  were  exempt 
from  such  taxation.  United  States  v.  Railroad 
Co.,  17  Wall.  322.  As  to  soldiers  honorably 
discharged,  see  11  Int.  Rev.  Rec.  123. 


WHAT  IS   NET   INCOME  21 

That  gifts  of  money,  when  not  for  services 
or  other  valuable  consideration,  were  not 
liable,  and  amounts  received  on  life  insurance 
policies  and  tort  damages  were  exempt.  7  Int. 
Rev.  Rec.  59.  See  3  Int.  Rev.  Rec.  118;  41 
U.  S.  Rev.  Journ.  77.  But  see  above  as  to  the 
income  from  gifts. 

That  extra  pay  granted  to  officers  by  special 
acts  was  liable.  2  Int.  Rev.  Rec.  108.  For 
cases  where  certain  salaries  of  government 
employees  were  to  be  included  with  other 
taxable  income,  and,  in  the  event  of  the  salary 
exceeding  a  certain  amount,  the  amount  of 
salary  from  which  the  tax  had  been  deducted 
was  to  be  deducted  from  the  gross  income,  see 
7  Int.  Rev.  Rec.  59. 

Professions,  vocations,  businesses,  trade,  com- 
merce. 

Betting  is  a  vocation.  Partridge  v.  Mallan- 
daine,  L.  R.  18  Q.  B.  D.  276. 

The  tax  on  brokers,  under  the  act  of  1864, 
is  stated  in  United  States  v.  Cutting,  3  Wall. 
441;  United  States  v.  Fisk,  Ibid.  445.  As  to 
tax  on  deposits  in  savings  banks  under  the 
old  law,  see  Bank  for  Savings  v.  Collector,  3 
Wall.  495. 

It  was  held  under  the  old  acts  — 

That  the  profits  of  a  manufacturer  from  his 


22  INCOME   TAX   LAW   EXPLAINED 

business  were  not  exempt  because  of  his  hav- 
ing paid  an  excise  tax  upon  his  manufactures. 
Bout.  (1863),  275. 

That  a  merchant's  return  should  cover  the 
business  of  the  income  year,  excluding  previous 
years,  and  that  uncollected  accounts  must  be 
estimated.  Bout.  (1863),  273. 

That  lawyers  and  physicians  might  return 
either  the  actual  fees  of  the  income  year  no 
matter  when  accrued,  or  the  amounts  due  to 
the  business  of  that  year.  7  Int.  Rev.  Rec.  59. 

That  if  the  manufacturer  or  dealer  had  esti- 
mated his  annual  profits  by  taking  inventories 
of  stock,  he  might  take  the  cost  value  unless  he 
had  taken  the  market  value  in  making  previous 
returns.  7  Int.  Rev.  Rec.  59. 

That  when  a  taxpayer  had  adopted  one 
method  of  estimating,  he  could  not  subse- 
quently adopt  another.  7  Int.  Rev.  Rec.  59. 

That  there  was  no  distinction  between  in- 
come from  business  and  fixed  investments. 
7  Int.  Rev.  Rec.  59. 

Sales  or  dealings  in  property,  whether  real  or 
personal,  growing  out  of  the  ownership  or  use  of 
or  interest  in  real  or  personal  property. 

In  Merchants'  Ins.  Co.  v.  McCartney,  12 
Int.  Rev.  Rec.  122,  1  Lowell,  447,  it  was  held 
that  surplus  earnings  laid  aside  by  a  bank 


WHAT  IS  NET   INCOME  23 

before  the  first  income  tax  law,  and  profits  of 
sales  of  real  estate  bought  before  that  time,  were 
not  liable  to  the  income  tax  when  divided  after- 
ward, and  that  under  13  St.  at  Large,  281,  282, 
an  insurance  company  holding  shares  in  a 
bank  was  not  liable  to  a  tax  upon  a  dividend 
declared  by  the  bank,  and  on  which  the  bank 
had  paid  full  income  tax. 

It  was  held  under  the  old  Acts  — 

That  if  an  inventor  sold  his  invention  for 
a  gross  sum,  he  should  return  the  whole  amount, 
less  expenses  of  perfecting  the  invention  and 
procuring  a  patent;  if  he  sold  only  a  portion 
of  his  right  during  the  year  he  might  deduct  a 
proportionate  amount  of  the  expense.  7  Int. 
Rev.  Rec.  59. 

That  where  a  corporation  distributed  its 
assets  after  liquidation  among  its  stockholders, 
the  difference  between  the  price  paid  for  the 
shares  and  the  sum  so  received  was  taxable  as 
profits.  2  Int.  Rev.  Rec.  138.  As  to  undis- 
tributed earnings  made  before  September  1, 
1862,  see  Bout.  (1863),  275;  12  Int.  Rev.  Rec. 
157. 

That  if  a  part  of  a  piece  of  real  estate  pur- 
chased within  the  required  time  was  sold,  the 
excess  of  the  sum  received  over  the  sum  paid 
for  the  same  portion  should  be  returned.  5  Int. 
Rev.  Rec.  138.  And  the  fact  that  the  real 


24  INCOME   TAX   LAW   EXPLAINED 

estate  had  been  increased  in  value  by  the 
erection  of  buildings,  either  within  the  pre- 
scribed tune,  or  within  some  period  previous, 
did  not  render  any  part  of  the  receipts  of  sale 
taxable.  1  Int.  Rev.  Rec.  196. 

That  profits  and  losses  within  1867  on  sales 
of  real  estate  purchased  since  December  31, 
1864,  should  be  returned.  7  Int.  Rev.  Rec.  60. 
As  to  points  in  case  of  underlying  coal,  see 
7  Int.  Rev.  Rec.  60;  5  Int.  Rev.  Rec.  154.  It 
was  held  that  the  profit  on  the  sale  of  mined 
coal  by  the  miner  was  the  difference  between 
the  amount  received  and  the  expense  of  pro- 
duction (excluding  all  deductions  for  the  per- 
sonal service  of  the  miner  and  family)  plus 
the  amount  paid  for  each  ton  to  the  owner  or 
lessor  of  the  mine;  and  the  profit  of  the  owner 
or  lessor  of  the  mine  thus  receiving  pay  from 
the  lessee  or  miner  was  the  difference  between 
the  amount  received  for  each  ton  and  the  esti- 
mated amount  paid  for  each  originally.  7  Int. 
Rev.  Rec.  60. 

That  the  profit  realized  on  a  sale  of  standing 
or  felled  timber  was  returnable,  irrespective 
of  the  time  when  the  land  was  purchased;  that 
timber  was  converted  into  personalty  by 
severance  from  the  land  on  which  it  grew,  and 
profits  from  the  sale  thereof  were  as  liable  to 
the  tax  as  those  from  the  sale  of  other  prod- 


WHAT   IS   NET   INCOME  25 

ucts  of  the  soil,  or  from  mines,  and  that  a 
farmer  who  kept  woodland  to  cut  and  sell  fire- 
wood, or  a  proprietor  who  sold  to  others  the 
privilege  of  cutting,  etc.,  the  timber,  should 
be  required  to  estimate  the  receipts  as  a  part 
of  his  income.  Bout.  (1863),  301;  1  Int.  Rev. 
Rec.  171. 

That  when  timber  was  sold  standing  the 
taxable  profits  were  arrived  at  by  estimating 
the  value  of  the  land  after  the  timber  was  re- 
moved and  adding  the  net  amount  for  the 
timber,  and  from  this  sum  deducting  the  esti- 
mated value  of  the  land  at  the  beginning  of 
the  income  year.  7  Int.  Rev.  Rec.  58.  As  to 
the  expense  of  cutting  the  timber  and  carry- 
ing it  to  market,  see  41  U.  S.  Rev.  Journ.  98. 

That  profits  on  the  sales  of  personal  property 
should  be  assessed  irrespective  of  the  time 
when  purchased,  and  that  the  rule  relating  to 
realty  did  not  apply  to  personalty.  41  U.  S. 
Rev.  Journ.  98. 

That  leases  were  personal  property.  7  Int. 
Rev.  Rec.  59;  2  Id.  44. 

That  a  mining  claim  arising  from  the  loca- 
tion of  a  mine  on  the  public  mineral  lands  was 
personal  property,  and  the  difference  between 
the  actual  cost  and  the  price  received  from  the 
claim  was  the  profits.  4  Int.  Rev.  Rec.  124. 

The  present  law  is  intended  to  cover  sales 


26  INCOME   TAX   LAW  EXPLAINED 

and  dealings  in  real  estate,  and  it  is  probable 
that,  if  a  person  sells  to-day  at  a  profit  real 
estate  which  he  purchased  five  years  ago,  the 
money  would  be  free  from  tax. 

Interest,  Rent,  Dividends,  Securities. 

It  was  held  in  Barnes  v.  Railroads,  17  Wall. 
294,  that  interest  or  dividends  which  accrued 
before  January  1,  1870,  were  taxable,  though 
payable  or  declared  on  or  after  the  date  named. 

Interest  on  railroad  bonds  earned  in  1871 
but  payable  by  the  coupons  in  1872  was  held 
not  subject  to  the  tax  authorized  by  the  act  of 
1870  to  be  collected  in  1871.  United  States  v. 
Indianapolis  Railroad  Co.,  113  U.  S.  711. 

It  was  held  in  Stockdale  v.  Insurance  Com- 
panies, 20  Wall.  323,  that  whether  the  tax  on 
dividends  from  the  earnings  of  corporations 
for  1869  be  viewed  as  a  tax  on  the  shareholder 
or  on  the  corporation,  it  was  intended  to  tax 
the  earnings  for  that  year  by  the  section  which 
limited  the  duration  of  the  income  tax. 

Section  117  of  the  act  of  1864,  which  re- 
quired stockholders  in  certain  companies  to 
return  as  income  all  gains  and  profits  to  which 
entitled,  whether  "  divided  or  otherwise,"  was 
held  to  embrace  not  only  dividends  declared, 
but  profits  not  divided  and  invested  partly  in 
real  estate,  machinery,  and  raw  material,  and 


WHAT   IS   NET   INCOME  27 

partly  applied  to  the  payment  of  debts  in- 
curred in  previous  years.  Collector  v.  Hubbard, 
12  Wall.  1;  35  Conn.  563. 

It  was  held  in  United  States  v.  Central  Nat. 
Bank,  24  Fed.  Rep.  577,  that  when  taxes  im- 
posed by  a  State  law  are  imposed  upon  the 
stockholders  of  a  national  bank,  and  not  upon 
the  corporation,  the  failure  of  the  bank  to  re- 
turn and  pay  a  tax  upon  such  part  of  its  divi- 
dends declared  within  the  year  as  was  repre- 
sented by  the  amount  paid  for  such  state  tax, 
would  not  entitle  it  to  exemption  to  that  ex- 
tent from  the  tax  under  the  act  of  1866,  and 
the  bank  having  declared  a  dividend  as  of 
earnings  for  the  current  year,  and  paid  it  as 
such  to  the  stockholders,  proof,  to  avoid  the 
tax,  that  no  earnings  had  been  made  because 
of  the  defalcation  of  the  cashier,  was  in- 
admissible. 

The  act  of  Congress  of  July  14,  1870,  relat- 
ing to  the  taxation  of  railroad  bonds;  was  part 
of  the  general  system  of  income  taxation,  and 
fixed  a  time  when  that  system  should  expire; 
and,  in  taxing  the  interest  on  such  bonds  as 
part  of  the  corporate  earnings,  it  applied  only 
to  interest  actually  paid,  not  to  that  merely 
payable.  United  States  v.  Louisville  R.  Co., 
33  Fed.  Rep.  829. 

An  insurance  company,  a  stockholder  in  a 


28  INCOME   TAX   LAW   EXPLAINED 

bank,  received  a  dividend,  three-tenths  from 
profits  accumulated  before  the  first  act  for 
collecting  internal  revenue,  and  seven-tenths 
from  profits  acquired  afterwards.  The  bank, 
more  than  five  years  before  the  case  was  tried, 
had  paid  the  revenue  tax  on  the  seven-tenths 
and  denied  a  liability  to  taxation  for  the  three- 
tenths,  and  it  had  never  been  enforced.  Held, 
that  the  three-tenths  was  capital,  and  not 
liable  to  assessment  as  income,  under  the  act 
of  June  30,  1864  and  that  the  seventh-tenths 
having  been  once  assessed  to  the  bank,  could 
not  be  again  assessed  to  the  insurance  com- 
pany. Merchants'  Ins.  Co.  v.  McCartney,  1 
Lowell,  447;  12  Int.  Rev.  Rec.  122. 

It  was  further  held  under  the  old  Acts  - 

That  where  a  railway  company  paid  to  alien 
non-resident  holders  of  its  bonds  the  entire 
interest  due  from  time  to  time  thereon,  no 
claim  having  been  made  here  against  it  for  any 
penalty,  it  was  liable  to  the  United  States  for 
five  per  cent  on  the  amount  so  paid,  with  in- 
terest thereon  at  the  rate  of  six  per  cent  per 
annum.  United  States  v.  Erie  Railway  Co., 
106  U.  S.  327. 

That  interest  accrued  during  the  previous 
year  on  United  States  securities  should  be  re- 
turned. 7  Int.  Rev.  Rec.  60. 

That   interest   accrued   during   the   income 


WHAT  IS  NET  INCOME  29 

year  on  notes,  bonds,  etc.,  if  good  and  col- 
lectible at  the  end  of  the  year,  should  be  re- 
turned whether  collected  or  not.  7  Int.  Rev. 
Rec.  59.  See  41  U.  S.  Rev.  Journ.  97, 

That  where  an  absolute  deed  was  taken  in- 
stead of  a  mortgage,  and  an  agreement  given 
to  reconvey  upon  the  payment  of  a  certain 
sum  equal  to  the  loan  with  interest,  the  trans- 
action was  equivalent  to  a  mortgage,  and  the 
gain  to  the  lender  must  be  returned.  3  Int. 
Rev.  Rec.  140. 

That  interest  should  be  considered  as  income 
only  when  paid,  unless  collectible  and  remain- 
ing unpaid  by  consent  of  the  creditor.  Bout. 
(1863),  274. 

That  scrip  dividends  returnable  as  income 
should  be  returned  at  their  market  value.  7 
Int.  Rev.  Rec.  60. 

That  dividends  payable  in  the  income  year 
should  be  returned  as  income  for  that  year, 
no  matter  when  declared.  Bout.  (1863),  274. 

That  if  a  corporation  took  any  of  its  earnings 
and  added  them  to  the  working  capital  and 
then  made  a  new  division  of  stock,  the  stock- 
holders were  to  pay  a  tax  on  the  additional 
stock;  and  if,  on  the  other  hand,  it  divided  to 
all  its  stockholders  its  net  earnings  during  the 
year,  and  after  so  doing  gave  to  each  stock- 
holder two  certificates  for  one  held  before, 


30  INCOME   TAX   LAW   EXPLAINED 

there  was  no  liability  for  such  additional  cer- 
tificate except  upon  the  dividend,  and  that 
there  was  no  tax  on  a  nominal  increase.  1  Int. 
Rev.  Rec.  188. 

That  such  portions  of  a  stock  dividend  as 
were  made  up  of  earnings  acquired  before 
July  1,  1862,  were  not  to  be  returned.  2  Int. 
Rev.  Rec.  61.  See  1  Int.  Rev.  Rec.  155. 

That  a  person  who  would  be  entitled  to  a 
share  in  the  profits  of  a  company,  etc.,  if 
divided,  should  return  the  same  as  income, 
whether  divided  or  otherwise.  7  Int.  Rev. 
Rec.  60.  See  Collector  v.  Hubbard,  12  Wall.  1. 
See  also  41  Int.  Rev.  Rec.  98. 

That  profits  of  companies  accruing  in  the 
income  year  were  liable  to  be  returned;  but  if 
there  was  a  division  and  no  surplus  remained 
at  the  end  of  the  income  year,  only  the  amount 
divided  should  be  returned.  1  Int.  Rev.  Rec. 
180. 

That  profits  of  a  gas  company  carried  to 
construction  account  should  be  returned  as 
income  by  the  stockholders;  and  undistributed 
earnings  of  a  corporation  made  before  Sep- 
tember, 1862,  should  not  be  considered  as 
income  of  the  stockholders,  nor  should  the 
corporation  be  required  to  make  return  as 
trustee.  3  Int.  Rev.  Rec.  164. 

That  depositors  receiving  interest  from  sav- 


WHAT  IS  NET  INCOME  31 

ings  banks  described  in  the  proviso  to  §  110  of 
the  act  of  1864  were  required  to  return  the 
same.  11  Int.  Rev.  Rec.  73. 

That  the  owner  of  a  ship  was  to  return  as 
income  the  entire  earnings  received  in  1862 
from  the  completed  voyage  and  was  not  to 
return  as  income  for  1862  earnings  received 
from  a  voyage  completed  in  1863.  The  tax  on 
whalers  was  to  be  assessed  on  the  total  yield 
on  the  termination  of  the  voyage.  Bout. 
(1863),  303. 

As  to  rents,  it  was  held  under  the  old  law — 

That  the  rental  value  of  property  occupied 
by  the  owner  was  neither  to  be  included  in  his 
income  nor  deducted.  1  Int.  Rev.  Rec.  171. 
See  Ibid.  130. 

That  a  party  renting  his  own  house  and 
paying  rent  elsewhere  must  return  the  rent 
received,  anjj  was  to  be  allowed  to  deduct  the 
amount  of  the  rent  paid.  4  Int.  Rev.  Rec.  46; 
5  Int.  Rev.  Rec.  154.  For  a  case  where  land 
was  leased  for  years  under  a  contract  that  the 
lessee  should  erect  a  building  and  the  expense 
of  erecting  the  building  was  held  to  be  in  the 
nature  of  rent,  and  returnable  by  the  lessor, 
see  7  Int.  Rev.  Rec.  60. 

That  where  one  cultivated  the  land  of  an- 
other under  a  contract  to  pay  for  the  use  in 
produce,  it  was  rent  and  should  be  returned, 


32  INCOME   TAX  LAW  EXPLAINED 

and  the  expenses  were  to  be  deducted  from  the 
income  of  the  lessee  only.  7  Int.  Rev.  Rec.  60. 

That  under  the  act  of  1894  rents  were  not 
taxable  as  income.  41  U.  S.  Rev.  Journ.  109. 

Points  of  practice  as  to  the  taxpayer  enter- 
ing the  dividends  upon  his  return,  etc.,  are  set 
forth  in  10  Int.  Rev.  Rec.  9. 

Transaction  of  any  lawful  business  carried  on 
for  gain  or  profit. 

It  was  held  under  the  old  Acts  — 
That  a  taxpayer  was  to  return  as  income  all 
profits  from  sale  of  stocks  made  within  the 
year,  though  bought  previously.  United  States 
v.  Smith,  1  Sawy.  277;  12  Int.  Rev.  Rec.  135. 
As  to  the  liability  of  stockholders  to  pay  on 
dividends  or  other  income  paid  to  them  by 
their  corporations,  see  Stockdale  v.  Ins.  Cos., 
20  Wall.  323;  Merchants'  Ins.  Co.  v.  McCart- 
ney, 1  Lowell,  447;  12  Int.  Rev.  Rec.  122; 
Magee  v.  Denton,  5  Blatch.  130. 

Gains  or  profits  and  income  derived  from  any 
source  whatever,  including  the  income  from  but 
not  the  value  of  property  acquired  by  gift,  bequest, 
devise,  or  descent. 

Promissory  notes,  book  accounts,  etc.,  due 
during  the  year  are  evidences  of  debt.  Whether 


WHAT   IS  NET   INCOME  33 

or  not  they  are  " gains,  profits,  or  income"  for 
that  year  within  the  statute  depends  upon 
their  value  intrinsically,  or  their  convertibil- 
ity into  money,  property,  or  available  assets. 
If  they  have  only  a  nominal,  and  not  a  real, 
value  of  convertible  quality,  and  a  man  has 
realized  nothing  from  them,  and  therefore 
does  not  return  them  as  a  part  of  his  income, 
because  he  fairly  and  honestly  believes  they 
are  not  real  gains  or  profits,  he  cannot  be  con- 
victed of  an  untrue  return.  United  States  v. 
Frost,  9  Int.  Rev.  Rec.  41. 

It  was  held  under  the  old  acts  — 

That  legatees  were  not  required  to  return 
their  legacies.  Bout.  (1863),  275. 

That  pensions  from  the  government  must  be 
returned.  Bout.  274;  4  Int.  Rev.  Rec.  45. 

That  incomes  from  coal  mines  were  to  be 
returned,  and  no  deductions  were  to  be  made 
on  account  of  diminished  value,  actual  or  sup- 
posed, of  the  coal  vein  or  bed  by  mining.  Bout. 
(1863),  274. 

That  the  payment  of  a  legacy,  etc.,  tax  on 
the  bequest  of  an  annuity  did  not  relieve  the 
annuitant  from  liability  on  his  income.  7  Int. 
Rev.  Rec.  60. 

That  where  any  portion  of  a  legacy  had  been 
transferred  by  the  executor  to  the  legatee,  so 
that  the  former  had  no  control  of  the  profits, 


34  INCOME   TAX   LAW  EXPLAINED 

they  must  be  returned  by  the  legatee.    7  Int. 
Rev.  Rec.  59. 

That  the  tax  should  be  withheld  from  all 
payments  on  account  of  prize  money,  irre- 
spective of  when  the  captures  were  made. 
7  Int.  Rev.  Rec.  11. 

Proceeds  of  life  insurance  policies  not  to  be 
included  as  income. 

Life  insurance  money  from  a  policy  taken 
out  by  another  for  the  assured  was  held  not 
subject  to  a  legacy  or  income  tax.  3  Int.  Rev. 
Rec.  140.  See  7  Int.  Rev.  Rec.  59.  And  so 
the  present  act  provides.  See  above,  page  15. 

The  following  are  rulings  as  to  produce,  live- 
stock, etc.,  under  the  old  acts. 

It  was  held  — 

That  a  farmer  should  return  all  the  produce 
sold  within  the  income  year,  and  that  there 
must  be  delivery,  either  actual  or  constructive, 
to  constitute  a  sale.  7  Int.  Rev.  Rec.  59. 

That  produce  raised  during  the  income  year, 
or  previous  years,  remaining  on  hand  unsold 
at  the  end  of  the  income  year,  need  not  be  re- 
turned. 11  Int.  Rev.  Rec.  113.  And  so  of 
produce  consumed  in  the  immediate  family. 
7  Int.  Rev.  Rec.  58.  See  United  States  v. 
Simons,  1  Abb.  U.  S.  470. 

That  profits  on  sales  of  livestock  were  to 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.      35 

be  estimated  by  deducting  the  purchase  money 
from  the  gross  receipts  from  the  sale.  7  Int. 
Rev.  Rec.  58. 

That  produce  returned  in  1863  at  $1,150, 
and  sold  in  1864  for  $2,000  was  to  be  returned 
as  income  for  1864  at  $2,000.  41  U.  S.  Rev. 
Journ.  98. 


DEDUCTIONS  —  BUSINESS  EXPENSES  — IN- 
TEREST —  TAXES  —  LOSSES,  ETC.  — 
EXCLUSIONS 

That  in  computing  net  income  for  the 
purpose  of  the  normal  tax  there  shall  be 
allowed  as  deductions:  First,  the  nec- 
essary expenses  actually  paid  in  carrying 
on  any  business,  not  including  personal, 
living,  or  family  expenses;  second,  all  in- 
terest paid  within  the  year  by  a  taxable 
person  on  indebtedness;  third,  all  National, 
State,  county,  school,  and  municipal  taxes, 
paid  within  the  year,  not  including  those 
assessed  against  local  benefits;  fourth,  losses 
actually  sustained  during  the  year,  incurred 
in  trade  or  arising  from  fires,  storms,  or 
shipwreck,  and  not  compensated  for  by  in- 


36  INCOME   TAX  LAW  EXPLAINED 

surance  or  otherwise;  fifth,  debts  due  to 
the  taxpayer  actually  ascertained  to  be 
worthless  and  charged  off  within  the  year; 
sixth,  a  reasonable  allowance  for  the  ex- 
haustion, wear  and  tear  of  property  aris- 
ing out  of  its  use  or  employment  in  the 
business  not  to  exceed,  in  the  case  of 
mines,  five  per  centum  of  the  gross  value 
at  the  mine  of  the  output  for  the  year 
for  which  the  computation  is  made,  but 
no  deduction  shall  be  made  for  any  amount 
of  expense  of  restoring  property  or  making 
good  the  exhaustion  thereof  for  which 
an  allowance  is  or  has  been  made:  Pro- 
vided, That  no  deduction  shall  be  allowed 
for  any  amount  paid  out  for  new  buildings, 
permanent  improvements,  or  betterments, 
made  to  increase  the  value  of  any  property 
or  estate;  seventh,  the  amount  received 
as  dividends  upon  the  stock  or  from  the 
net  earnings  of  any  corporation,  joint  stock 
company,  association,  or  insurance  com- 
pany, which  is  taxable  upon  its  net  income 
as  hereinafter  provided;  eighth,  the  amount 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       37 

of  income,  the  tax  upon  which  has  been 
paid  or  withheld  for  payment  at  the  source 
of  the  income,  under  the  provisions  of  this 
section,  provided  that  whenever  the  tax 
upon  the  income  of  a  person  is  required 
to  be  withheld  and  paid  at  the  source 
as  hereinafter  required,  if  such  annual 
income  does  not  exceed  the  sum  of  $3,000, 
or  is  not  fixed  or  certain,  or  is  indefinite,  or 
irregular  as  to  amount  or  time  of  accrual, 
the  same  shall  not  be  deducted  in  the  per- 
sonal return  of  such  person.  The  net 
income  from  property  owned  and  business 
carried  on  in  the  United  States  by  persons 
residing  elsewhere  shall  be  computed  upon 
the  basis  prescribed  in  this  paragraph  and 
that  part  of  paragraph  G  of  this  section 
relating  to  the  computation  of  the  net 
income  of  corporations,  joint-stock  and 
insurance  companies,  organized,  created, 
or  existing  under  the  laws  of  foreign  coun- 
tries, in  so  far  as  applicable. 

That  in  computing  net  income  under  this 
section  there  shall  be  excluded  the  interest 


38  INCOME   TAX   LAW   EXPLAINED 

upon  the  obligations  of  a  State  or  any  po- 
litical subdivision  thereof,  and  upon  the 
obligations  of  the  United  States  or  its 
possessions;  also  the  compensation  of  the 
present  President  of  the  United  States 
during  the  term  for  which  he  has  been 
elected,  and  of  the  judges  of  the  supreme 
and  inferior  courts  of  the  United  States 
now  in  office,  and  the  compensation  of  all 
officers  and  employees  of  a  State  or  any 
political  subdivision  thereof  except  when 
such  compensation  is  paid  by  the  United 
States  Government. 

In  the  act  of  1894,  §  28,  the  language,  new 
in  that  act,  was,  "the  necessary  expenses 
actually  incurred  in  carrying  on  any  business, 
occupation  or  profession." 

The  provisions  as  to  taxes  are  similar  to 
these  in  former  acts  except  that  the  words 
"school"  and  "not  including  those  assessed 
against  local  benefits"  appeared  first  in  the 
act  of  1894,  §  28.  Former  acts  contain  the 
words  "whether  such  person  be  owner,  tenant, 
or  mortgagor." 

As  to  losses,  "storms"  and  the  clause  "and 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       39 

not  compensated  for  by  insurance  or  other- 
wise" appeared  for  the  first  time  in  the  act  of 
1894,  §  28. 

As  to  worthless  debts,  the  clause  "and  charged 
off  during  the  year"  appears  for  the  first  time 
in  this  act. 

The  clause  "a  reasonable  allowance  for  the 
exhaustion,  wear  and  tear  of  property  arising 
out  of  its  use  or  employment  in  the  business," 
etc.,  is  new. 

Much  of  what  follows  beginning  with 
"seventh"  is  new.  However,  in  the  last  para- 
graph of  §  28  of  the  act  of  1894  it  is  provided 
that  the  amount  received  on  dividends  of  cor- 
porations, etc.,  shall  not  be  included  if  the  tax 
has  been  paid  on  the  net  profits  by  the  cor- 
poration, etc.,  as  required  by  the  act.  By  §  33 
of  the  act  of  1894,  it  was  provided  that  pay- 
masters, etc.,  should  withhold  at  the  source 
the  tax  upon  the  salaries  of  the  United  States 
officials. 

The  provision  as  to  the  obligations  of  a 
State  appears  to  be  new.  It  is  provided  in 
§  28  of  the  act  of  1894  that  in  estimating  gains, 
etc.,  there  should  be  included  income  from  in- 
terest on  bonds,  etc.,  "  except  such  bonds  of 
the  United  States  the  principal  and  interest 
of  which  are  by  the  law  of  their  issuance  exempt 
from  all  Federal  taxation." 


40  INCOME   TAX   LAW   EXPLAINED 

By  preceding  acts  and  especially  by  that  of 
1894,  §  33,  elaborate  provision  was  made  for 
taxing  salaries  of  persons  in  the  civil,  military, 
naval,  or  other  employment  or  service  of  the 
United  States,  including  Senators  and  Repre- 
sentatives and  Delegates  in  Congress,  etc. 
The  following  words  at  the  end  of  §  33  were 
new:  "Provided,  That  salaries  due  to  State, 
County,  or  municipal  officers  shall  be  exempt 
from  the  income  tax  herein  levied." 

The  necessary  expenses  actually  paid  in  carry- 
ing  on  any  business,  not  including  personal,  liv- 
ing, or  family  expenses. 

It  was  held  under  the  old  acts  — 

That  a  salaried  officer  of  the  government 
was  entitled  to  the  deduction  for  house  rent. 
Bout.  (1864),  153. 

That  the  whole  amount  expended  for  fer- 
tilizers applied  during  the  income  year  to  a 
farmer's  lands  might  be  deducted,  but  no  de- 
duction was  to  be  allowed  for  fertilizers  pro- 
duced on  the  farm;  and  the  cost  of  seed  for 
sowing,  etc.,  might  be  deducted.  7  Int.  Rev. 
Rec.  58. 

That  no  deduction  could  be  allowed  for  the 
subsistence  of  laborers  employed  on  a  farm  so 
far  as  they  lived  on  its  produce.  3  Int.  Rev. 
Rec.  140.  ' 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       41 

That  an  officer  could  not  deduct  the  expense 
of  servant  hire  or  fuel,  unless  the  latter  was 
consumed  in  business,  but  that  he  might  de- 
duct house  rent.  1  Int.  Rev.  Rec.  100. 

That  money  paid  for  labor,  except  such  as 
was  employed  in  domestic  matters  or  in  pro- 
ducing articles  consumed  by  the  family,  might 
be  deducted.  7  Int.  Rev.  Rec.  58. 

That  there  was  no  deduction  for  the  cost  of 
unproductive  labor;  but  if  house  servants  were 
employed  a  part  of  the  time  in  productive 
labor,  a  proportionate  part  of  the  wages  might 
be  deducted.  7  Int.  Rev.  Rec.  58.  And  ex- 
penditures for  labor  in  one  calendar  year  were 
not  deductible  from  the  proceeds  of  the  crop 
of  a  subsequent  year.  4  Int.  Rev.  Rec.  12. 

That  the  value  of  the  services  of  one's  minor 
children,  whether  paid  for  by  him  or  not,  was 
not  deductible;  but  adult  children  working 
for  him  and  receiving  compensation  were  like 
other  hired  laborers.  7  Int.  Rev.  Rec.  58. 

That  the  salary  of  one  taking  care  of  real 
estate  was  deductible  from  such  income  of  the 
person  paying  the  salary  as  was  derived  from 
the  real  estate.  3  Int.  Rev.  Rec.  102. 

That  if  expenses  claimed  to  be  deductible 
were  not  specified,  the  assessor  might  disallow 
them  if  he  doubted  their  legality.  1  Int.  Rev. 
Rec.  100.. 


42  INCOME   TAX   LAW  EXPLAINED 

That  costs  of  suits,  etc.,  arising  from  ordi- 
nary business  were  the  same  as  other  expenses 
thereof,  and  might  be  deducted  from  the  gross 
profits.  7  Int.  Rev.  Rec.  59. 

That  medical  expenses,  store  bills,  etc.,  were 
not  deductible,  but  those  for  repair  of  tools, 
etc.,  used  in  business  were.  7  Int.  Rev.  Rec.  59. 
And  physicians  obliged  to  keep  a  horse  were 
allowed  to  deduct  so  much  of  the  expense  as 
was  referable  to  the  business.  7  Int.  Rev. 
Rec.  59. 

That  the  amount  paid  for  the  good-will  of 
a  business  was  capital,  and  not  deductible. 
7  Int.  Rev.  Rec.  60. 

That  so  much  of  the  expense  of  railway 
season-tickets  used  in  going  from  home  to 
business  and  returning  as  was  fairly  charge- 
able to  business  expenses  might  be  deducted. 
1  Int.  Rev.  Rec.  172. 

That  necessary  expenses  of  conveyance  in 
travelling  in  the  prosecution  of  business  might 
be  deducted.  7  Int.  Rev.  Rec.  60.  So  hotel 
bills  incurred  in  the  prosecution  of  business  or 
in  temporarily  residing  in  hotels  in  the  prosecu- 
tion of  business,  were  to  be  deducted.  11  Int. 
Rev.  Rec.  122. 

That  insurance  moneys  paid  as  an  expense 
of  business,  but  not  other  insurance  moneys, 
were  deductible,  and  insurance  paid  by  a 


DEDUCTIONS,  BUSINESS  EXPENSES,  ETC.       43 

tenant  was  deductible  from  the  tenant's  in- 
come as  rent  paid.  7  Int.  Rev.  Rec.  59.  See 
5  Int.  Rev.  Rec.  123. 

That  the  expense  of  sinking  wells  worthless 
when  exhausted  was  a  necessary  expense  of 
the  business  of  producing  oil  for  sale,  and  might 
be  deducted  from  the  income  of  one  so  engaged. 
But  that  those  who  sank  wells  to  sell  to  others 
should  not  be  allowed  the  deduction.  11  Int. 
Rev.  Rec.  123. 

That  the  subsistence  of  horses,  etc.,  used  in 
carrying  on  the  farm  might  be  deducted. 
Bout.  (1863),  274.  And  the  expenses  of  carry- 
ing on  a  farm  might  be  deducted  from  the  in- 
come of  the  year  only  when  paid.  6  Int.  Rev. 
Rec.  3. 

That  expenses  on  property,  real  or  personal, 
from  which  no  income  was  derived,  were  not 
deductible.  11  Int.  Rev.  Rec.  50. 

That  rent  of  a  homestead  actually  paid 
might  be  deducted,  but  the  rental  value  of  the 
taxpayer's  property  was  not  deductible;  but 
where  the  taxpayer  rented  a  furnished  house, 
that  part  of  the  rent  paid  for  the  use  of  the 
furniture  was  not  deductible.  7  Int.  Rev.  Rec. 
59.  See  5  Int.  Rev.  Rec.  154;  4  Int.  Rev.  Rec. 
46.  In  41  U.  S.  Rev.  Journ.  77,  it  is  said  that 
no  deduction  can  be  allowed  for  rent  paid  for 
a  residence  where  persons  live  in  rented  houses. 


44  INCOME   TAX   LAW   EXPLAINED 

That  any  one  claiming  a  deduction  for  ex- 
pense for  room  rent  must  satisfy  the  assessor 
that  the  room  constituted  his  home  and  resi- 
dence; and  in  this  event  he  might  deduct  what 
he  paid  for  rent,  irrespective  of  rent  of  furni- 
ture or  care  of  room;  and  when  rent  was  de- 
ducted as  an  expense  of  business,  it  could  not 
be  deducted  again  as  rent,  and  one  hiring  a 
house  and  subletting  a  portion  could  not  de- 
duct more  than  the  excess  of  his  payments 
over  receipts.  7  Int.  Rev.  Rec.  59;  Bout. 
(1863),  276. 

That  where  a  taxpayer  paid  a  gross  sum  for 
room  and  board,  and  had  no  home  elsewhere, 
he  could  deduct  a  fair  allowance  for  rent  of 
such  room,  and  that  the  assessor  should  de- 
termine, from  his  best  information,  what  pro- 
portion of  the  amount  paid  was  payment  for 
the  room  only;  and  that  no  deduction  should 
be  allowed  for  rent  of  furniture,  care  of  rooms, 
or  for  fuel  or  lights  used.  11  Int.  Rev.  Rec.  58. 

That  stockholders  could  not  deduct  assess- 
ments paid  by  them  to  the  corporation  to  make 
good  a  deficiency  in  the  capital  stock  of  the  re- 
serve fund.  41  U.  S.  Rev.  Journ.  77. 

That  capital  invested  in  any  stockholding 
company  was  not  recognized  as  capital  used 
in  business,  and  there  was  no  deduction  for 
the  loss  of  such  capital.  4  Int.  Rev.  Rec.  46. 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       45 

That  penalties  imposed  for  violation  of  the 
excise  law  were  legitimate  offsets  to  the  profits 
of  the  business  in  connection  with  which  they 
were  incurred,  but  that  they  could  not  be  al- 
lowed as  deductions  from  income  actually 
realized  from  other  pursuits.  4  Int.  Rev. 
Rec.  46. 

All  interest  paid  within  the  year  by  a  taxable 
person  on  indebtedness. 

It  was  held  under  the  old  acts  — 

That  where  a  person  could  not  be  compelled 
to  pay  interest  nominally  falling  due  in  the 
year,  it  could  not  be  deducted,  except  that 
where  interest  was  paid  on  an  income-paying 
business,  only  such  portion  as  was  not  in  excess 
of  the  interest  due  to  the  taxpayer  was  to  be 
offset  against  income.  7  Int.  Rev.  Rec.  59. 

That  interest  on  borrowed  capital  used  in 
business  might  be  deducted.  Bout.  (1863),  275. 

That  interest  paid  on  money  invested  in 
business  or  real  estate,  from  which  no  income 
was  derived,  was  not  deductible;  but  interest 
thus  paid  might  be  offset  against  interest  due 
to  the  taxpayer.  11  Int.  Rev.  Rec.  50;  7  Id.  59. 

That  if  a  mortgage  on  a  homestead  was  given 
to  secure  the  payment  of  money  invested  in 
business  from  which  income  was  derived,  the 
interest  paid  was  deductible;  but  where,  how- 


46  INCOME   TAX   LAW   EXPLAINED 

ever,  the  mortgage  was  given  to  secure  the 
purchase  price,  or  any  part  thereof,  interest 
paid  was  not  deductible,  except  where  it  might 
be  offset  against  interest  received  or  falling 
due;  and  if  interest  had  been  received  by  rent- 
ing any  portion  of  the  mortgaged  premises,  a 
ratable  deduction  of  interest  paid  should  be 
allowed.  11  Int.  Rev.  Rec.  89. 

That  where  a  mortgage  was  given  on  a  home- 
stead for  the  purchase  price,  or  any  part  thereof, 
the  interest  paid  was  not  deductible  except 
where  it  might  be  offset  against  interest  re- 
ceived or  falling  due;  and  if  income  was  re- 
ceived from  the  rental  of  any  portion  of  the 
mortgaged  premises,  a  ratable  deduction  of 
interest  paid  should  be  allowed.  11  Int.  Rev. 
Rec.  89,  97. 

All  National,  State,  county,  school,  and  muni- 
cipal taxes  paid  within  the  year,  not  including 
those  assessed  against  local  benefits. 

Mr.  Speer  in  his  Federal  Income  Tax  Law, 
published  in  October,  1913,  says  at  page  15, 
"The  exclusion  of  the  taxes  assessed  against 
local  benefits  is  probably  upon  the  ground  that 
the  local  benefits  increase  the  value  of  the 
property  affected  to  an  amount  equal  to  the 
taxes  assessed  and  paid  for  such  benefits. 
While  the  law  reads  that  all  taxes  of  the  nature 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       47 

mentioned  which  are  paid  within  the  year  are 
deductible,  it  will  require  a  ruling  of  the  Treas- 
ury Department  to  determine  whether  such 
payments  will  be  limited  to  the  taxes  falling 
due  within  the  year  for  which  return  is  made, 
or  whether  the  payment  of  accumulated  taxes 
which  were  due  in  previous  years  will  also  be 
allowed  as  deductions." 

It  was  held  under  the  old  acts  — 

That  the  assessment  paid  on  a  pew  should 
be  considered  a  contribution  and  not  a  tax. 
Bout.  (1864),  153. 

That  local  assessments  for  cleaning  or  re- 
pairing sewers  were  legitimate  deductions  from 
the  income  of  the  property  upon  which  such 
assessments  were  laid.  Bout.  (1864),  151. 

That  taxes  deducted  from  the  income  of  a 
previous  year  could  not  be  deducted  again. 
1  Int.  Rev.  Rec.  181. 

That  when  the  owner  occupied  the  property, 
he  was  entitled  to  deduct  the  taxes  paid  thereon 
as  if  the  same  were  rented.  1  Int.  Rev.  Rec. 
155. 

That  State  and  municipal  taxes  paid  upon 
a  homestead,  and  ordinary  repairs  thereon, 
were  deductible.  11  Int.  Rev.  Rec.  89. 

That  national,  state,  county,  and  municipal 
taxes  actually  paid  were  deductible  from  the 
income  of  the  year  in  which  payment  was 


48  INCOME   TAX   LAW   EXPLAINED 

made,  even  though  paid  on  property  from  which 
no  income  was  derived.  11  Int.  Rev.  Rec.  98. 
But  that  such  taxes  not  actually  paid  until 
after  the  end  of  the  income  year  should  not  be 
deducted  from  that  year's  income,  even  though 
they  might  have  been  then  due.  7  Int.  Rev. 
Rec.  60.  As  to  legacy  and  succession  taxes, 
see  7  Int.  Rev.  Rec.  59. 

That  assessments  by  municipal  corporations 
for  the  laying  out,  etc.,  of  streets,  sewers,  etc., 
might  be  deducted  from  income  where  they 
were  laid  upon  all  taxpayers  within  the  cor- 
poration. 1  Int.  Rev.  Rec.  196;  Bump,  292. 

That  assessments  upon  the  property  holders 
of  a  certain  locality  by  the  municipal  au- 
thorities on  account  of  special  improvements 
in  streets  adjoining  their  premises,  should  be 
deducted  from  the  income  of  persons  so  assessed. 
5  Int.  Rev.  Rec.  115;  Bump,  292. 

That  where  by  state  laws  stocks  divided  into 
shares  were  not  taxable  by  cities  and  towns, 
but  were  taxed  to  the  companies,  and  the  tax 
collected  by  the  State  was  credited  to  the 
towns  where  the  stockholders  resided,  the 
stockholder  could  not  deduct  the  tax  from  his 
income,  since  the  deduction  was  made  by  the 
corporation  before  the  dividend  was  declared. 
1  Int.  Rev.  Rec.  181.  See  10  Int.  Rev.  Rec.  9. 

That  the  income  withheld  by  corporations 


DEDUCTIONS,  BUSINESS  EXPENSES,  ETC.      49 

from  the  dividends  of  the  shareholder,  as  pro- 
vided by  the  internal  revenue  laws,  should  be 
deducted,  since  the  tax  was  in  reality  a  tax 
upon  the  shareholder,  and  its  payment  by  the 
corporation  was  merely  a  mode  of  collecting 
it.  10  Int.  Rev.  Rec.  9. 

Losses  actually  sustained  during  the  year,  in- 
curred in  trade,  or  arising  from  fires,  storms,  or 
shipwreck,  and  not  compensated  for  by  insurance 
or  otherwise. 

It  was  held  under  the  old  acts  — 

That  losses  in  one  kind  of  business  might  be 
deducted  from  the  gains  in  another,  or  from  the 
gross  income  of  the  year,  and  that  assessors 
should  not  allow  the  deduction  of  amounts 
claimed  to  have  been  lost  in  business  when 
in  reality  they  should  be  regarded  as  in- 
vestments or  expenditures.  3  Int.  Rev.  Rec. 
140;  7  Id.  59. 

That  no  so-called  loss  incurred  by  a  gift  of 
property  could  be  allowed  as  a  deduction.  7 
Int.  Rev.  Rec.  59. 

That  the  fact  that  income  was  devoted  to 
payment  of  debts  did  not  release  the  same  from 
liability  to  income  tax.  7  Int.  Rev.  Rec.  59. 

That  the  original  cost  of  property  destroyed 
by  fire  during  the  year,  less  insurance  received, 
might  be  deducted  from  the  income  for  that 


50  INCOME   TAX   LAW   EXPLAINED 

year  of  the  person  to  whom  the  loss  occurred. 
5  Int.  Rev.  Rec.  154. 

That  the  loss  of  a  stock  company  by  fire  or 
shipwreck,  if  liable  to  tax,  would  be  deducti- 
ble from  its  income,  not  from  that  of  its  stock- 
holders; and  the  fact  that  such  company  was 
not  subject  to  income  tax  made  a  loss  of  this 
kind  none  the  less  a  loss  of  the  company.  5 
Int.  Rev.  Rec.  148. 

That  there  could  be  no  deduction  for  de- 
preciation in  stocks  or  other  property  until 
disposed  of  and  a  loss  realized.  7  Int.  Rev. 
Rec.  59.  But  where  stocks  were  sold  for  less 
than  actual  cost  the  difference  between  such 
cost  and  the  price  was  allowed  as  a  deduction 
from  income  of  the  year  of  sale.  7  Int.  Rev. 
Rec.  59. 

That  losses  during  the  income  year  on  sales 
of  real  estate  purchased  during  the  income 
year,  or  within  two  years  previous,  might  be 
deducted  from  the  income  for  such  income 
year.  7  Int.  Rev.  Rec.  60.  But  losses  from 
exchange  of  real  estate  are  estimated  losses 
while  the  property  is  in  the  hands  of  the 
original  parties  and  are  not  deductible.  41 
U.  S.  Rev.  Journ.  77. 

That  losses  of  capital  such  as  by  robbery,  or 
as  surety,  etc.,  could  not  be  deducted.  7  Int. 
Rev.  Rec.  60.  And  losses  in  business  since  the 


DEDUCTIONS,  BUSINESS  EXPENSES,  ETC.       51 

end  of  the  income  year  could  not  enter  into  the 
income  assessments  for  that  year.  Bout.  (1863), 
275;  1  Int.  Rev.  Rec.  181;  2  Id.  68. 

That  no  deduction  could  be  made  for  money 
paid  on  a  judgment  against  a  taxpayer  in  an 
action  of  tort.  1  Int.  Rev.  Rec.  155. 

That  a  mere  speculative  loss,  there  being 
no  sale,  could  not  be  deducted.  3  Int.  Rev. 
Rec.  109.  So  of  estimated  depreciations,  as 
of  vessels.  1  Int.  Rev.  Rec.  109,  197.  As 
to  the  custom  of  ship-owners  to  charge  off  a 
certain  sum  on  account  of  the  depreciation 
of  vessels,  see  Bout.  (1864),  152. 

That  the  owners  of  vessels  might  balance 
the  gains  and  losses  as  a  whole,  setting  the 
gains  of  one  against  the  losses  of  another,  in- 
cluding even  the  entire  loss  of  a  vessel  by 
capture,  shipwreck,  or  other  disaster,  on  which 
there  was  no  insurance.  Bout.  (1863),  303. 

That  where  a  farmer  lost  animals  by  death, 
he  might  deduct  the  purchase  money;  but  if 
the  animals  were  raised  by  him,  there  could 
be  no  deduction.  3  Int.  Rev.  Rec.  100. 

That  where  a  company  had  collapsed  and 
the  stock  was  worthless,  the  loss  on  such  stock 
should  be  deducted  from  the  income  of  the 
year  in  which  the  company  ceased  to  exist. 
11  Int.  Rev.  Rec.  105. 


52  INCOME   TAX  LAW  EXPLAINED 

Debts  due  to  the  taxpayer  actually  ascertained 
to  be  worthless  and  charged  off  within  the  year. 

It  was  held  under  the  old  acts  — 

That  payment  by  a  surety  made  the  prin- 
cipal his  debtor.  Whether  the  debt  was  worth- 
less or  not  was  a  question  to  be  determined 
in  each  particular  case.  Money  paid  as  surety 
would  not  necessarily  be  lost,  but  when  found 
to  be  a  loss  it  might  be  deducted  under  the 
head  of  " debts  ascertained  to  be  worthless." 
9  Int.  Rev.  Rec.  121. 

That  a  merchant  was  entitled  to  deduct 
from  his  gross  profits  the  bad  debts  of  the  year 
to  which  the  statement  related,  or  such  as 
appeared  to  be  bad  at  the  end  of  the  year. 
United  States  v.  Mayer,  Deady,  127. 

That  debts  previously  considered  good,  but 
found  to  be  worthless  during  the  income  year, 
might  be  deducted  from  the  creditor's  income 
for  that  year,  if  never  before  deducted.  7  Int. 
Rev.  Rec.  60. 

That  there  must  be  a  discretion  given  in 
making  returns,  and  that  it  was  not  necessary 
to  make  a  debt  deductible  that  it  should 
be  declared  worthless  at  law  or  in  equity. 
United  States  v.  Frost,  9  Int.  Rev.  Rec.  41,  42. 

In  construing  the  New  Brunswick  act, 
31  Viet.  c.  36,  it  is  said,  "  Their  Lordships 
have  felt  some  difficulty  in  appreciating  the 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       53 

view  of  the  Chief  Justice,  that  the  bad  debts 
of  the  current  year  are  a  loss  'pro  tanto  of 
capital/  and  that,  in  such  case,  'it  is  the 
capital  invested  that  is  really  lost,  and  not 
the  income/  Surely  every  banker  or  trader 
properly  conducting  his  affairs,  would,  in  the 
first  instance  at  least,  charge  losses  to  income; 
that  is,  in  ascertaining  the  income  of  a  year's 
business,  would  set  the  losses  of  the  year  against 
its  profits.  To  treat  profits  as  income  and  to 
charge  losses  to  capital  would  be  to  enter  upon 
a  road  leading  very  directly  to  financial  ruin." 
Lawless  v.  Sullivan,  6  Appeal  Case,  373,  382. 

A   reasonable   allowance  for   the   exhaustion, 
wear  and  tear  of  property  arising  out  of  its  use 
or  employment  in  the  business,  not  to  exceed, 
in  the  case  of  mines,  etc. 
It  was  held  under  the  old  acts  — 
That   estimated   appreciations   or   deprecia- 
tions of  the  value  of  property  were  not  to  be 
considered    in    ascertaining    amounts    to    be 
taxed.    5  Int.  Rev.  Rec.  154. 

No  deduction  shall  be  made  for  any  amount 
of  expense  of  restoring  property  or  making 
good  the  exhaustion  thereof  for  which  an  allow- 
ance is  or  has  been  made. 

It  was  held  under  the  old  acts  — 


54  INCOME   TAX   LAW   EXPLAINED 

That  a  person  was  not  allowed  to  improve 
the  property,  but  was  allowed  to  devote  the 
income  to  restoration.  I  Int.  Rev.  Rec. 
180. 

That  repairs  were  allowable  irrespective  of 
the  productive  nature  of  the  property.  1  Int. 
Rev.  Rec.  156. 

That  the  replacing  of  worn-out  tools,  etc., 
was  repairs,  so  far  as  the  new  article  equalled 
the  estimated  value  of  the  old  on  January  1, 
1862,  and  was  permanent  improvement  in  the 
amount  by  which  the  value  of  the  new  article 
exceeded  that  of  the  old  on  that  date.  2  Int. 
Rev.  Rec.  61. 

That  the  laying  of  a  new  floor  or  putting  on 
a  new  roof  was  generally  ordinary  repairs; 
but  the  replacing  of  a  shingle  roof  by  a  slate 
one,  or  a  board  floor  by  a  tile  one,  or  indeed 
the  substitution  of  a  higher-priced  article  for 
an  inferior,  was  not  ordinary  repairs,  and  only 
the  value  of  the  inferior  article  would  be  de- 
ductible. 11  Int.  Rev.  Rec.  50. 

No  deduction  shall  be  allowed  for  any  amount 
paid  out  for  new  buildings,  permanent  improve- 
ments, or  betterments,  made  to  increase  the  value 
of  any  property  or  estate. 

It  was  held  under  the  old  acts  — 

That  a  person  was  not  allowed  to  improve 


DEDUCTIONS,  BUSINESS   EXPENSES,  ETC.       55 

the  property,  but  was  allowed  to  devote  the 
income  to  restoration.  1  Int.  Rev.  Rec.  180. 

That  repairs  should  be  distinguished  from 
permanent  improvements.  2  Int.  Rev.  Rec.  61. 
See  Little  v.  Little,  161  Mass.  188. 

That  expenses  for  ditching,  etc.,  new  land 
were  for  permanent  improvements,  and  not 
deductible.  7  Int.  Rev.  Rec.  58. 

That  " permanent  improvements"  and  " bet- 
terments," as  used,  were  nearly  synonymous, 
and  referred  to  that  class  of  improvements, 
permanently  increasing  the  value  of  the  prop- 
erty, while  "repairs"  were  those  improve- 
ments which  prevented  the  property  from 
becoming  useless  or  depreciating;  and  that 
in  ascertaining  the  amount  to  be  allowed 
for  repairs,  the  assessor  must  determine,  ac- 
cording to  circumstances,  how  much  of  the 
improvements  were  to  prevent  depreciation 
and  how  much  were  to  give  permanent  addi- 
tional value.  5  Int.  Rev.  Rec.  130.  See 
41  U.  S.  Rev.  Journ.  77. 

That  the  replacing  of  worn-out  tools,  etc., 
was  repairs,  so  far  as  the  new  article  equalled 
the  estimated  value  of  the  old  on  January 
1,  1862,  and  was  permanent  improvement  in 
the  amount  by  which  the  value  of  the  new 
article  exceeded  that  of  the  old  on  that  date, 
2  Int.  Rev.  Rec.  61. 


56  INCOME   TAX   LAW   EXPLAINED 

That  the  removal  of  an  old  roof  and  the 
substitution  of  a  modern  one,  and  raising 
the  walls  of  the  building  to  conform  thereto, 
were  improvements.  Bout.  (1863),  306. 

That  amounts  expended  by  the  purchaser  of  a 
building  in  repairing  injuries  thereto  prior  to 
his  purchase  were,  so  far  as  he  was  concerned, 
betterments  made  to  increase  the  value,  and 
were  not  deductible.  7  Int.  Rev.  Rec.  60. 

That  expenses  in  putting  property  in  better 
condition  than  when  purchased,  or,  if  pur- 
chased before  January  1,  1862,  than  it  was  on 
that  date,  were  not  deductible.  11  Int.  Rev. 
Rec.  73. 

That  the  laying  of  a  new  floor,  or  putting 
on  a  new  roof,  was  generally  ordinary  repairs; 
but  the  replacing  of  a  shingle  roof  by  a  slate  one, 
or  a  board  floor  by  a  tile  one,  or  indeed  the 
substitution  of  a  higher-priced  article  for  an 
inferior,  was  not  ordinary  repairs,  and  only  the 
value  of  the  inferior  article  would  be  deduc- 
tible. 11  Int.  Rev.  Rec.  50. 

Amount  received  as  dividends  upon  the  stock 
or  from  the  net  earnings  of  any  corporation^ 
etc.j  which  is  taxable  upon  its  net  income  as 
hereinafter  provided. 

This  is  deductible  for  the  normal  tax  but 
must  be  reported  for  the  additional  tax. 


DEDUCTION   OF   $3,000  OR   $4,000  57 

The  amount  of  income  the  tax  upon  which  has 
been  paid  or  withheld  for  payment  at  the  source,  etc. 

See  the  provisions  as  to  collection  at  the 
source,  pages  83  et  seq. 

DEDUCTION  OF  $3,000  OR  $4,000  — HUS- 
BAND AND  WIFE. 

C.  That  there  shall  be  deducted  from 
the  amount  of  the  net  income  of  each  of 
said  persons,  ascertained  as  provided  herein, 
the  sum  of  $3,000,  plus  $1,000  additional 
if  the  person  making  the  return  be  a  mar- 
ried man  with  a  wife  living  with  him,  or 
plus  the  sum  of  $1,000  additional  if  the 
person  making  the  return  be  a  married 
woman  with  a  husband  living  with  her; 
but  in  no  event  shall  this  additional  exemp- 
tion of  $1,000  be  deducted  by  both  a  hus- 
band and  a  wife:  Provided,  that  only 
one  deduction  of  $4,000  shall  be  made 
from  the  aggregate  income  of  both  husband 
and  wife  when  living  together. 

There  is  a  marked  difference  between  this 
provision  and  that  in  the  act  of  1894,  Sec.  28. 


58  INCOME   TAX   LAW   EXPLAINED 

"It  is  clear  that  guardians,  trustees,  execu- 
tors, administrators,  agents,  receivers,  con- 
servators, and  all  persons,  corporations,  or 
associations  acting  in  any  fiduciary  capacity 
are  also  authorized  to  deduct  the  specific 
exemption  of  $3,000  in  the  return  of  net  in- 
come they  are  required  to  make  for  the  per- 
son for  whom  they  act.  The  law  is  not  specific 
as  to  this  but  provides  that  no  return  in  such 
cases  shall  be  made  if  the  income  does  not 
exceed  $3,000."  Speer,  22. 

It  was  held  under  the  old  law  that  an  as- 
sociation so  formed  that  its  gains  were  the 
property  of  the  whole  association,  and  were 
not  divisible  among  the  members,  was  only 
entitled  to  the  statutory  exemption,  and  was 
not  entitled  to  the  statutory  exemption  for 
each  member.  10  Int.  Rev.  Rec.  39.  But  see 
Bout.  (1864),  154. 

Old  decisions  and  rulings  as  to  husband, 
wife,  etc.,  may  be  found  in  11  Int.  Rev.  Rec. 
89,  153;  7  Int.  Rev.  Rec.  59;  2  Int.  Rev.  Rec. 
61;  1  Int.  Rev.  Rec.  156,  171,  188.  See  also  41 
U.  S.  Rev.  Journ.  77. 


RETURNS  —  INCREASE  OF  AMOUNTS. 

D.   The  said  tax  shall  be  computed  upon 
the  remainder  of  said  net  income  of  each 


RETURNS;   INCREASE   OF  AMOUNTS  59 

person  subject  thereto,  accruing  during 
each  preceding  calendar  year  ending  De- 
cember thirty-first :  Provided)  however,  that 
for  the  year  ending  December  thirty-first, 
nineteen  hundred  and  thirteen,  said  tax 
shall  be  computed  on  the  net  income 
accruing  from  March  first  to  December 
thirty-first,  nineteen  hundred  and  thirteen, 
both  dates  inclusive,  after  deducting  five- 
sixths  only  of  the  specific  exemptions  and 
deductions  herein  provided  for.  On  or 
before'  the  first  day  of  March,  nineteen 
hundred  and  fourteen,  and  the  first  day  of 
March  in  each  year  thereafter,  a  true  and 
accurate  return,  under  oath  or  affirmation, 
shall  be  made  by  each  person  of  lawful 
age,  except  as  hereinafter  provided,  sub- 
ject to  the  tax  imposed  by  this  section, 
and  having  a  net  income  of  $3,000  or  over 
for  the  taxable  year,  to  the  collector 
of  internal  revenue  for  the  district  in  which 
such  person  resides  or  has  his  principal 
place  of  business,  or,  in  the  case  of  a  person 
residing  in  a  foreign  country,  in  the  place 


60  INCOME    TAX    LAW   EXPLAINED 

where  his  principal  business  is  carried  on 
within  the  United  States,  in  such  form  as 
the  Commissioner  of  Internal  Revenue, 
with  the  approval  of  the  Secretary  of  the 
Treasury,  shall  prescribe,  setting  forth  spe- 
cifically the  gross  amount  of  income  from 
all  separate  sources  and  from  the  total  there- 
of, deducting  the  aggregate  items  or  ex- 
penses and  allowance  herein  authorized; 
guardians,  trustees,  executors,  administra- 
tors, agents,  receivers,  conservators,  and 
all  persons,  corporations,  or  associations 
acting  in  any  fiduciary  capacity,  shall 
make  and  render  a  return  of  the  net  in- 
come of  the  person  for  whom  they  act, 
subject  to  this  tax,  coming  into  their  cus- 
tody or  control  and  management,  and  be 
subject  to  all  the  provisions  of  this  section 
which  apply  to  individuals:  Provided,  that 
a  return  made  by  one  or  two  or  more  joint 
guardians,  trustees,  executors,  administra- 
tors, agents,  receivers,  and  conservators, 
or  other  persons  acting  in  a  fiduciary 
capacity,  filed  in  the  district  where  such 


KETUKNS;  INCBEASE  OF  AMOUNTS          61 

person  resides,  or  in  the  district  where  the 
will  or  other  instrument  under  which  he 
acts  is  recorded,  under  such  regulations 
as  the  Secretary  of  the  Treasury  may 
prescribe,  shall  be  a  sufficient  compliance 
with  the  requirements  of  this  paragraph; 
and  also  all  persons,  firms,  companies, 
copartnerships,  corporations,  j  oint-stock 
companies  or  associations,  and  insurance 
companies,  except  as  hereinafter  provided, 
in  whatever  capacity  acting,  having  the 
control,  receipt,  disposal,  or  payment  of 
fixed  or  determinable  annual  or  periodical 
gains,  profits,  and  income  of  another  per- 
son subject  to  tax,  shall  in  behalf  of  such 
person  deduct  and  withhold  from  the 
payment  an  amount  equivalent  to  the 
normal  income  tax  upon  the  same  and 
make  and  render  a  return,  as  aforesaid, 
but  separate  and  distinct,  of  the  portion 
of  the  income  of  each  person  from  which 
the  normal  tax  has  been  thus  withheld, 
and  containing  also  the  name  and  address 
of  such  person  or  stating  that  the  name 


62  INCOME   TAX   LAW  EXPLAINED 

and  address  or  the  address,  as  the  case  may 
be,  are  unknown:  Provided,  that  the  pro- 
vision requiring  the  normal  tax  of  indi- 
viduals to  be  withheld  at  the  source  of  the 
income  shall  not  be  construed  to  require 
any  of  such  tax  to  be  withheld  prior  to  the 
first  day  of  November,  nineteen  hundred 
and  thirteen:  Provided  further,  that  in 
either  case  above  mentioned  no  return 
of  income  not  exceeding  $3,000  shall  be 
required:  Provided  further,  that  any  per- 
sons carrying  on  business  in  partnership 
shall  be  liable  for  income  tax  only  in  their 
individual  capacity,  and  the  share  of  the 
profits  of  a  partnership  to  which  any  tax- 
able partner  would  be  entitled  if  the  same 
were  divided,  whether  divided  or  other- 
wise, shall  be  returned  for  taxation  and  the 
tax  paid,  under  the  provisions  of  this  sec- 
tion, and  any  such  firm,  when  requested 
by  the  Commissioner  of  Internal  Revenue, 
or  any  district  collector,  shall  forward  to 
him  a  correct  statement  of  such  profits 
and  the  names  of  the  individuals  who 


KETURNS;   INCREASE   OF  AMOUNTS  63 

would  be  entitled  to  the  same,  if  distribu- 
ted: Provided  further,  that  persons  liable 
for  the  normal  income  tax  only,  on  their 
own  account  or  in  behalf  of  another,  shall 
not  be  required  to  make  return  of  the  in- 
come derived  from  dividends  on  the  capital 
stock  or  from  the  net  earnings  of  corpora- 
tions, joint-stock  companies  or  associations, 
and  insurance  companies  taxable  upon  their 
net  income  as  hereinafter  provided.  Any 
person  for  whom  return  has  been  made  and 
the  tax  paid,  or  to  be  paid  as  aforesaid, 
shall  not  be  required  to  make  a  return 
unless  such  person  has  other  net  income,  but 
only  one  deduction  of  $3,000  shall  be  made 
in  the  case  of  any  such  person.  The  col- 
lector or  deputy  collector  shall  require 
every  list  to  be  verified  by  the  oath  or 
affirmation  of  the  party  rendering  it.  If 
the  collector  or  deputy  collector  have  reason 
to  believe  that  the  amount  of  any  income 
returned  is  understated,  he  shall  give  due 
notice  to  the  person  making  the  return  to 
show  cause  why  the  amount  of  the  return 


64  INCOME   TAX  LAW  EXPLAINED 

should  not  be  increased,  and  upon  proof 
of  the  amount  understated  may  increase 
the  same  accordingly.  If  dissatisfied  with 
the  decision  of  the  collector,  such  person 
may  submit  the  case,  with  all  the  papers, 
to  the  Commissioner  of  Internal  Revenue 
for  his  decision,  and  may  furnish  sworn 
testimony  of  witnesses  to  prove  any  rele- 
vant facts. 


This  sub-section  differs  radically  from  the 
provisions  of  previous  acts,  and  a  long  state- 
ment of  the  differences  is  likely  to  confuse. 
It  is  to  be  noted,  however,  that  it  was  provided 
in  §  29  of  the  act  of  1894  that  in  the  case  of 
neglect  or  refusal  to  make  a  list,  or  in  case 
of  a  wilfully  false  list,  it  was  the  duty  of  the 
collector  or  deputy  collector  to  make  such 
list  "according  to  the  best  information  he  can 
obtain,  by  the  examination  of  such  person,  or 
any  other  evidence. "  In  the  act  of  1867  it  was 
provided  that  the  books  of  account  might  be 
examined.  As  to  examinations,  see  now  page 
193. 

It  appears  from  the  above  that  the  first 
tax  is  on  income  from  March  1  to  December 
31,  and  that  the  deductions  are  five-sixths  of 


RETURNS;   INCREASE   OF  AMOUNTS  65 

the  exemptions  and  deductions  specified,  and 
that  thereafter  the  reports  are  to  cover  the 
calendar  year  from  January  1  in  each  case. 

Tax  income  blanks  are  distributed  through 
post  offices,  internal  revenue  offices,  and  other 
federal  agencies;  and,  unless  the  tax  is  paid 
at  the  source,  the  taxpayer  will  have  to  apply 
for  a  blank,  as  the  law  does  not  seem  to  make 
it  obligatory  on  the  Government  to  send 
him  one. 

The  return  must  be  verified  by  oath  before 
an  authorized  officer  having  a  seal,  as  a  notary; 
and,  if  verified  before  a  justice  of  the  peace, 
a  certificate  of  a  clerk  of  court  must  be  at- 
tached. Witnesses  probably  will  not  be  re- 
quired. The  return  will  be  filed  with  the  col- 
lector of  internal  revenue  for  the  district  in 
which  the  taxpayer  resides;  and,  if  he  resides 
abroad,  hi  the  district  in  which  he  last  re- 
sided or  in  which  his  principal  business  is 
located.  In  case  of  sickness  or  absence,  the 
collector  may  allow  further  time  for  making  a 
return,  not  exceeding  thirty  days.  See  §  3126. 
See  also  provisions  cited  on  p.  86.  Blank  forms 
of  application  for  extension  of  time  will  prob- 
ably be  furnished;  if  not,  the  taxpayer  may 
present  a  petition  in  his  own  language  stating 
why  extension  is  necessary.  The  location  of 
the  collector's  office  may  be  easily  ascer- 


DO  INCOME  TAX  LAW  EXPLAINED 

tained.  A  handy  list  of  the  location  of  col- 
lectors' offices  and  their  addresses  is  given  in 
Speer,  66-77. 

It  is  to  be  noted  that  a  partner  is  liable  in- 
dividually, and  profits  to  which  he  would 
be  entitled  if  divided,  whether  divided  or 
otherwise,  shall  be  returned  for  both  taxes, 
and  the  firm,  when  requested  by  the  Com- 
missioner of  Internal  Revenue  or  Collector, 
shall  forward  a  statement  of  profits  and  the 
names  of  those  entitled  to  the  same,  if  dis- 
tributed. The  writer  in  the  Wall  St.  Journ. 
in  Art.  XVII  observes  that  the  clause  in  this 
sub-division  beginning,  "Provided  further,  that 
any  persons  carrying  on  business  in  partner- 
ship/' etc.,  "directly  levies  the  tax  on  all 
partnership  profits,  thus  eliminating  any  ques- 
tion as  to  the  character  of  the  partnership." 
See  Art.  XI. 

It  will  be  seen  that  those  liable  for  the  nom- 
inal tax  only,  individually  or  for  another, 
are  not  to  make  return  of  income  from  divi- 
dends or  net  earnings  of  corporations,  etc., 
taxable  upon  their  net  income;  that,  if  they 
have  no  other  income  they  need  not  make  a 
return,  and  that  any  person  for  whom  return 
has  been  made  and  the  tax  paid  as  aforesaid 
is  not  to  make  a  return  unless  such  person 
has  other  net  income,  but  only  one  deduction 


RETURNS;   INCREASE   OF  AMOUNTS  67 

of  $3,000  shall  be  made  in  the  case  of  any 
such  person. 

For  determining  the  additional  tax  the 
return  must  include  the  share  of  gains,  etc., 
of  all  companies,  incorporated  or  partnership, 
to  which  the  taxable  person  is  entitled,  divided 
or  distributed  or  not  divided  or  distributed,  if 
such  companies  are  formed  or  fraudulently 
used  to  prevent  the  tax  by  permitting  the 
gains,  etc.,  to  accumulate. 

Amounts  received  from  corporations,  etc. 
(the  normal  tax  having  been  paid),  must  be  in- 
cluded in  the  return,  but  only  to  determine 
the  liability  to  the  additional  tax. 

Forms  of  returns  are  given  in  Speer,  13,  19. 

Early  in  1895  Mr.  Thomas  Harland,  a 
gentleman  of  great  experience  in  former  years 
in  the  Bureau  of  Internal  Revenue,  wrote  a 
carefully  prepared  letter  or  brief  upon  the 
law  of  1894,  in  which  he  called  attention 
to  its  imperfections  and  particularly  to  the 
inadequacy  of  the  machinery  for  the  assess- 
ment of  the  tax.  Mr.  Harland  quoted  in  the 
act  of  1894  provisions  of  §  29,  §  34  as  amending 
§§  3172,  3173,  and  3176  of  the  U.  S.  Rev. 
Sts.  The  letter  or  brief  is  given  in  full  in 
41  U.  S.  Rev.  Journ.  93-97  and  is  still  of  in- 
terest, although  most  of  the  points  raised 
are  met  in  the  present  act. 


68  INCOME   TAX   LAW   EXPLAINED 

It  was  held  under  the  old  acts  as  to  re- 
turns — 

That  the  unexplained  destruction  or  dis- 
appearance of  the  taxpayer's  books  of  account 
was  prima  fade  evidence  of  fraud.  1  Int. 
Rev.  Rec.  155. 

That  when  a  dividend  had  been  declared  by  a 
corporation  and  had  become  payable,  its 
amount  was  to  be  regarded  as  forming  part  of 
the  taxable  income  of  the  stockholders  of  the 
company,  even  though  they  did  not  call  for 
and  receive  the  dividend.  Magee  v.  Denton, 
5  Blatch.  130. 

That  the  taxpayer  was  not  obliged  to  answer 
questions  asked  him,  but  his  refusal  to  answer 
might  properly  be  construed  against  him. 
1  Int.  Rev.  Rec.  155.  Of  the  law  of  1894 
it  is  said  in  41  U.  S.  Rev.  Journ.  117,  "The 
law  is  peculiarly  obnoxious  to  business  men, 
because  of  its  perplexing  and  harassing  require- 
ments as  to  rendering  returns.  These  require- 
ments should  be  interpreted,  so  far  as  they 
can  be,  in  a  sense  favorable  to  the  merchant 
and  the  manufacturer.  It  is  impossible  for 
any  man  in  active  business  to  answer  cate- 
gorically questions  as  to  his  income,  or  to  de- 
termine exactly  the  application  to  himself 
of  the  numerous  vexatious  details  of  the  law. 
It  should  certainly  be  sufficient  if  he  honestly 


RETURNS;   INCREASE   OF   AMOUNTS  69 

disclose  the  facts  required  of  him  when  he  is 
called  upon,  without  fining  him  for  not  neglect- 
ing his  business  and  dancing  attendance  upon 
the  pleasure  of  a  collector  for  the  privilege  of 
revealing  to  him  facts  that  he  withholds  from 
everybody  else."  In  a  letter  dated  May  6, 
1865,  the  Deputy  Commissioner  says:  "As 
to  the  questions  recommended  to  be  asked  by 
assessors  —  and  to  which  you  take  objection  — 
it  is  believed  the  same  are  civil,  and  as  such 
ought  to  be  answered,  if  an  assessor  feels 
bound  to  ask  them.  It  is  not  claimed  that 
taxpayers  are  obliged  to  answer  the  same; 
but  a  refusal,  unless  a  reason  for  such  refusal 
is  given,  might  lead  the  assessor  to  doubt  the 
correctness  of  the  return.  It  is  not  supposed 
that  the  mere  putting  of  these  interrogatories 
will  be  an  effectual  check  to  fraud,  but  the 
experience  of  the  office  has  shown  that  such 
questions  are  of  great  convenience  in  refreshing 
the  memory  of  a  large  class  of  honest  taxpayers, 
who  are  not  accustomed  to  keeping  accounts, 
and  who,  in  many  instances,  cannot  call  to 
mind  all  the  sources  of  their  income,  unless  they 
are  thus  reminded.  As  to  the  question  to 
which  you  particularly  allude,  if  the  taxpayer 
answers  that  he  holds  no  stocks  except  such  as 
were  purchased  so  recently  that  he  has  derived 
no  income  from  them,  the  assessor  would  go 


70  INCOME   TAX   LAW   EXPLAINED 

no  further,  if  satisfied  of  the  truth  of  the  state- 
ment." 1  Int.  Rev.  Rec.  155. 

That  lawyers  and  physicians  might  return 
either  the  actual  fees  received  during  the  year, 
without  regard  to  the  time  when  they  accrued, 
or  the  amounts  due  to  the  business  of  the 
year;  but  that  when  the  taxpayer  had  here- 
tofore adopted  one  method,  he  could  not  be 
allowed  to  make  use  of  the  other.  7  Int.  Rev. 
Rec.  59. 

That  an  assessor  might  require  returns  of 
income  from  persons  sojourning  in  his  district 
for  a  few  months  at  a  time,  and  transmit 
the  same  to  the  assessors  of  the  several  districts 
in  which  the  parties  resided.  Bout.  (1864), 
154. 

That  the  law  did  not  require  notice  to  be 
served  on  persons  to  make  returns.  3  Int. 
Rev.  Rec.  151. 

That  under  the  act  of  1894  the  instruction 
as  to  the  income  return  by  trustees  meant  that 
the  sum  received  from  trustees  by  beneficiaries 
should  not  be  returned  as  " taxable  income"; 
that  the  same  should  be,  however,  noted  as 
income,  or  deducted  as  an  amount  upon  which 
the  tax  has  already  been  paid  and  that  the 
instruction  referred  practically  to  cases  of 
beneficiaries  who  had  income  in  addition  to 
that  received  from  a  trustee,  and  was  intended 


KETUENS;   INCREASE   OF  AMOUNTS  71 

to  prevent  escape  of  income  from  taxation. 
Further  that,  where  a  trustee  distributed  tax- 
able income  to  beneficiaries,  he  must  make 
a  return  for  each  of  said  beneficiaries,  as  the 
taxable  interests  appeared,  at  the  place  of  his 
residence,  without  regard  to  the  location  of  the 
beneficiaries.  41  U.  S.  Rev.  Journ.  77. 

That  legal  representatives  should  make  re- 
turn for  their  decedents.  Mandell  v.  Pierce, 
3  Cliff,  134;  7  Int.  Rev.  Rec.  59,  193;  Bout. 
(1863),  304.  See  provisions  of  present  act 
cited  on  p.  60. 

That  in  the  case  of  an  association  like  the 
Shakers,  its  trustees  might  make  return  of  its 
income.  10  Int.  Rev.  Rec.  39. 

That  in  case  of  persons  under  guardianship, 
the  guardian,  if  any,  should  make  return  of  the 
ward's  income;  if  none  had  been  appointed,  the 
parent,  as  natural  guardian,  might  act.  If 
there  was  no  other  person  to  act,  the  ward 
might  make  the  return;  if  he  neglected  to  do 
so,  an  independent  assessment  might  be  made 
omitting  the  penalty.  7  Int.  Rev.  Rec.  59; 
11  Int.  Rev.  Rec.  186;  Bout.  (1863),  258. 

That  the  guardian's  return  should  always  be 
upon  information  and  belief.  1  Int.  Rev.  Rec. 
181. 

That  the  guardian's  residence  determined  the 
district  for  his  return;  if  he  resided  abroad,  the 


72  INCOME   TAX   LAW  EXPLAINED 

ward's  residence  determined  the  district.  3  Int. 
Rev.  Rec.  172.  The  duties  imposed  on  trustees 
and  guardians  are  further  discussed  in  the  Wall 
St.  Journ.  Art.  XIV. 

That  taxpayers,  not  cognizant  of  their  re- 
sponsibilities, ought  to  be  informed  of  them,  and 
those  unable  to  make  out  their  returns  should 
be  instructed.  41  U.  S.  Rev.  Journ.  97. 

That  even  though  a  false  return  was  accepted 
without  alteration  and  the  tax  paid,  it  had  no 
binding  effect  upon  the  government.  41  U.  S. 
Rev.  Journ.  97. 

It  was  stated  under  the  old  law  that  it  would 
be  a  hardship  to  assess  an  additional  amount 
upon  the  income  of  masters  of  vessels,  who  left 
home  before  a  certain  date,  being  ignorant  of 
the  law,  leaving  no  agent,  etc.,  "and  it  is  pre- 
sumed that  assessors  might  find  some  means  of 
ascertaining  their  income  without  proceeding 
under"  the  law.  Bout.  (1864),  154.  The  form 
of  notice  under  the  old  law  to  parties  charged 
with  failure,  neglect,  or  refusal  to  make  returns 
is  given  in  9  Int.  Rev.  Rec.  113. 

REMEDIES. 

The  remedies  of  a  taxpayer  in  case  of 
an  increase  of  the  return  are  a  hearing  before 
the  collector,  and  from  him  an  appeal  to 


REMEDIES  73 

the   Commissioner   of   Internal   Revenue. 
See  p.  64. 

Speer  says  at  p.  30  as  to  claims  for  abatement 
or  refund  of  taxes :  "If  any  person  shall  consider 
that  any  tax  assessed  has  been  erroneously  or 
unjustly  assessed  or  that  the  amount  of  such 
tax  is  in  excess  of  the  amount  actually  due,  such 
person  may  file  a  claim  for  abatement  before 
the  tax  is  paid,  or  a  claim  for  refund  after  the 
tax  is  paid,  asking  for  the  refund  or  return  of  all 
or  such  portion  of  the  tax  assessed  or  paid  which 
is  considered  to  be  in  excess  of  the  amount  ac- 
tually due. 

"Such  claims  must  be  prepared  on  forms  fur- 
nished by  the  collectors,  who  will  also  furnish 
full  information  as  to  their  preparation  and  the 
nature  of  the  evidence  required  in  support  of 
the  claim.  Such  claims  must  be  filed  with  the 
collector." 

The  general  method  of  procedure,  however, 
is  as  follows : 

There  is  no  remedy  by  injunction,  as  it  is  pro- 
vided that  "no  suit  for  the  purpose  of  restrain- 
ing the  assessment  or  collection  of  any  tax 
shall  be  maintained  in  any  court."  U.  S.  Rev. 
Sts.  §  3244. 

Points  on  applications  for  the  writs  of  manda- 
mus, certiorari,  and  prohibition  against  collec- 


74  INCOME   TAX   LAW  EXPLAINED 

tors  and  deputy  collectors  of  internal  revenue 
and  against  the  Commissioner  of  Internal 
Revenue  may  be  found  in  Foster  &  Abbot, 
233-241. 

The  Commissioner  of  Internal  Revenue  is, 
on  appeal  made  to  him,  to  remit  all  taxes  and 
penalties  illegally  collected,  etc.,  provided,  that 
where  a  second  assessment  is  made  in  case  of  a 
return  which  was  false,  such  assessment  shall  not 
be  remitted,  unless  it  is  proved  that  such  return 
was  not  false.  U.  S.  Rev.  Sts.  §  3220.  Appeal 
to  the  Commissioner  of  Internal  Revenue  and 
his  decision  thereon  are  conditions  precedent 
to  the  bringing  of  suit.  If  such  decision  is  de- 
layed more  than  six  months  from  the  date  of 
appeal,  the  suit  may  be  brought,  without  having 
a  decision  at  any  time  within  the  period  limited 
within  the  next  section.  U.  S.  Rev.  Sts.  §  3226. 
The  suit  must  be  brought  within  two  years  next 
after  the  cause  of  action  accrued.  U.  S.  Rev.  Sts. 
§  3227.  All  claims  for  the  refunding  of  any 
illegal  tax  or  penalty  must  be  presented  to  the 
Commissioner  of  Internal  Revenue  within  two 
years  next  after  the  cause  of  action  accrued. 
U.  S.  Rev.  Sts.  §  3228. 

A  suit  cannot  be  maintained  against  a  collec- 
tor to  recover  a  tax  illegally  assessed  or  collected 
without  authority,  or  any  sum  alleged  to  have 
been  excessive  or  in  any  manner  wrong,  if  the 


REMEDIES  75 

taxpayer  has  failed,  within  two  years  next  after 
the  cause  of  action  accrued,  to  present  to  the 
Commissioner  of  Internal  Revenue  his  claim 
for  refunding  according  to  law.  Kings  Co.  Sav. 
Inst.  v.  Blair,  110  U.  S.  200. 

The  general  way  of  contesting  a  tax  has  been 
to  pay  the  money  under  duress  and  protest  and 
then  sue  the  collector  for  money  had  and  re- 
ceived. The  taxes  should  be  paid  under  pro- 
test. Patton  v.  Brady,  184  U.  S.  608,  614. 

"Whilst  a  written  protest  would  in  all  cases 
be  most  convenient,  there  is  no  statutory  re- 
quirement that  the  protest  shall  be  in  writing. 
In  the  present  case,  the  court  merely  finds  that 
the  payment  of  the  tax  and  penalty  was  made 
under  protest,  which  may  have  been  either 
written  or  verbal."  Wright  v.  Blakeslee,  101 
U.  S.  174,  179.  As  to  duress  and  protest,  see 
further  United  States  v.  New  York  Steamship 
Co.,  200  U.  S.  488;  Johnson  v.  Herold,  161  Fed. 
Rep.  593;  26  Att.  Gen.  Op.  472. 

An  allowance  by  the  Commissioner  of  Inter- 
nal Revenue  for  the  refund  of  a  tax  illegally 
collected  is  not  the  simple  passing  of  an  ordinary 
claim  by  an  ordinary  accounting  officer,  but  an 
award  upon  which  an  action  may  be  brought 
and  which  is  conclusive  unless  impeached  for 
fraud  or  mistake.  Edison  Elec.  Co.  v.  United 
States,  38  Ct.  of  Claims,  208;  United  States  v. 


76  INCOME   TAX   LAW   EXPLAINED 

Savings  Bank,  104  U.  S.  728;  United  States  v. 
Kaufman,  96  U.  S.  567. 

The  provisions  in  §  3226  that  no  suit  shall  be 
maintained  to  recover  back  any  internal  reve- 
nue tax  claimed  to  have  been  illegally  or  erro- 
neously collected  until  an  appeal  shall  have  been 
taken  to  the  commissioner  and  a  decision  had 
therein,  unless  such  decision  shall  have  been 
delayed  more  than  six  months,  is  not  merely  a 
statute  of  limitations,  but  prescribes  an  abso- 
lute condition  precedent,  which  is  not  waived 
by  a  failure  to  plead  it,  and  without  compli- 
ance with  which  a  suit  cannot  be  maintained; 
but  where,  before  payment  of  the  tax,  a  claim 
for  its  abatement  was  presented  to  the  com- 
missioner in  accordance  with  the  rules  of  the 
department,  and  rejected,  the  same  was  equiv- 
alent to  an  appeal,  and  an  appeal  after  payment 
on  the  same  grounds  was  not  necessary  to 
authorize  a  suit.  De  Bary  v.  Dunne,  162  Fed. 
Rep.  961.  Where  an  appeal  for  a  rebate  of  the 
tax,  taken  after  its  assessment,  but  before  its 
payment,  in  accordance  with  the  regulations  of 
the  department,  has  been  adversely  decided  by 
the  commissioner  on  the  merits,  a  second  appeal 
after  payment  of  the  tax  is  not  required  before 
bringing  suit.  Schwarzchild  Co.  v.  Rucker, 
143  Fed.  Rep.  656.  As  to  the  proviso  and  limi- 
tations, see  Merck  v.  Treat,  174  Fed.  Rep.  388; 


REMEDIES  77 

Christie  St.  Commission  Co.  v.  United  States, 
129  Fed.  Rep.  506;  136  Fed.  Rep.  326.  The 
matter  of  appeal  is  treated  in  Stewart  v.  Barnes, 
153  U.  S.  456,  458. 

The  remedy  of  a  suit  to  recover  back  the 
tax  after  it  is  paid,  which  the  statute  pro- 
vides, is  exclusive.  Snyder  v.  Marks,  109 
U.  S.  189. 

"The  rule  is  firmly  established  that  taxes 
voluntarily  paid  cannot  be  recovered  back,  and 
payments  with  knowledge  and  without  compul- 
sion are  voluntary.  At  the  same  time,  when 
taxes  are  paid  under  protest,  that  they  are  being 
illegally  exacted,  or  with  notice  that  the  payer 
contends  that  they  are  illegal  and  intends  to 
institute  suit  to  compel  then"  repayment,  a 
recovery  in  such  suit  may,  on  occasion,  be  had, 
although  generally  speaking,  even  a  protest  or 
notice  will  not  avail  if  the  payment  be  made 
voluntarily,  with  full  knowledge  of  all  the  cir- 
cumstances, and  without  any  coercion  by  the 
actual  or  threatened  exercise  of  power  possessed, 
or  supposed  to  be  possessed,  by  the  party  exact- 
ing or  receiving  the  payment,  over  the  person 
or  property  of  the  party  making  the  payment, 
from  which  the  latter  has  no  other  means  of 
immediate  relief  than  such  payment."  Fuller, 
C.  J.,  in  Chesebrough  v.  United  States,  192 
U.  S.  253,  259. 


78  INCOME   TAX   LAW   EXPLAINED 

The  right  of  action  in  such  cases  must  be 
founded  upon  the  acts  of  Congress,  and  not 
upon  an  implied  promise  at  common  law,  since 
a  promise  to  refund  cannot  be  implied  where 
the  statute  makes  it  the  officer's  duty  to  pay 
into  the  treasury  all  amounts  collected.  Col- 
lector v.  Hubbard,  12  Wall.  1. 

The  Commissioner  is  not  limited  to  paying  a 
judgment  against  a  collector  to  him,  but  may 
pay  it  directly  to  the  plaintiff.  United  States 
v.  Frerichs,  124  U.  S.  315. 

The  above  acts  of  Congress  apply  as  well  to 
suits  in  the  state  courts  as  those  in  the  Federal 
courts.  Collector  v.  Hubbard,  12  Wall.  1. 

The  authority  of  the  Commissioner  of  In- 
ternal Revenue  to  refund  a  tax  is  not  exhausted 
by  his  rejection  of  an  application  to  refund,  but 
he  may  afterwards,  under  U.  S.  Rev.  Sts.  §  3220, 
allow  to  a  collector  the  amount  recovered 
against  him  by  suit,  and  such  allowance  can  be 
impeached  only  for  fraud  or  mistake.  Nixon 
v.  United  States,  18  Ct.  01.  448.  Such  allow- 
ance properly  includes  costs  paid.  United  States 
v.  Davis,  54  Fed.  Rep.  147.  The  defence  of 
failure  to  take  an  appeal  to  the  Commissioner 
is  waived,  if  not  pleaded  in  abatement.  Hendy 
v.  Soule,  Deady,  400.  If  the  plaintiff  has  ac- 
cepted, without  objection,  payment  of  the 
amount  illegally  exacted,  he  thereby  surrenders 


REMEDIES  79 

his  right  to  sue  for  interest  as  incidental  dam- 
ages. Stewart  v.  Barnes,  153  U.  S.  456. 

A  decision  reported  by  the  Commissioner  of 
Internal  Revenue  in  1871,  as  to  the  refunding 
of  certain  taxes,  to  the  Secretary  of  the  Treas- 
ury for  his  advisement,  under  the  Treasury 
Regulations  then  in  force,  was  held  not  to  be 
final.  Stotesbury  v.  United  States,  146  U.  S. 
196.  See  Dupasseur  v.  United  States,  19  Ct. 
Cl.  1;  Sybrandt  v.  United  States,  19  Ct.  Cl. 
461.  A  corporation  is  not  bound  to  produce  its 
books  to  the  assessor  on  an  inquiry  into  the  in- 
come of  its  stockholders.  Re  Chadwick,  1 
Lowell,  439.  Under  the  act  of  1866,  the  lien 
of  the  income  tax  related  back,  upon  demand, 
to  the  time  when  the  tax  was  due,  but  only  as 
to  property  belonging  to  the  taxpayer  when  the 
demand  was  made.  United  States  v.  Pacific 
Railroad,  1  Fed.  Rep.  97.  As  to  the  intro- 
duction in  evidence  of  an  assessment  list,  regu- 
lar in  form,  making  a  prima  facie  case,  see  West- 
ern Express  Co.  v.  United  States,  141  Fed. 
Rep.  28. 

The  fact  that  an  assessment  had  been  paid 
did  not  bar  a  suit  to  recover  an  amount  claimed 
to  be  due  beyond  the  amount  so  assessed  and 
paid.  United  States  v.  Little  Miami  R.  Co.,  1 
Fed.  Rep.  700. 

It  was  held  under  the  old  law  that  when  im- 


80  INCOME   TAX   LAW  EXPLAINED 

proper  deductions  had  been  made  and  know- 
ingly allowed,  the  errors  could  not  be  corrected 
after  the  tax  had  been  paid,  and  that  when  the 
fact  of  an  understatement  had  been  subse- 
quently discovered,  the  amount  so  understated 
might  be  increased.  41  U.  S.  Rev.  Journ.  98. 

This  entire  subject  is  ably  treated  in  Foster 
&  Abbot,  chapter  VIII,  Remedies  of  Taxpayer. 

By  U.  S.  Rev.  Sts.  §  3229  it  is  provided  that 
the  Commissioner  of  Internal  Revenue,  with  the 
consent  of  the  Secretary  of  the  Treasury,  may 
compromise  cases  under  the  internal  revenue 
laws  instead  of  commencing  suit;  and,  with 
the  consent  of  the  secretary  and  the  recommen- 
dation of  the  Attorney  General,  may  compro- 
mise any  case  after  suit  brought.  But  see 
Speer,  20. 

WHEN  ASSESSMENTS  SHALL  BE  MADE  AND 
PAID  —  ADDITIONS  IN  CASE  OF  NON- 
PAYMENT. 

E.  That  all  assessments  shall  be  made 
by  the  Commissioner  of  Internal  Revenue 
and  all  persons  shall  be  notified  of  the 
amount  for  which  they  are  respectively 
liable  on  or  before  the  first  day  of  June 
of  each  successive  year,  and  said  assess- 


ASSESSMENTS  AND   ADDITIONS  81 

ments  shall  be  paid  on  or  before  the  thir- 
tieth day  of  June,  except  in  cases  of  refusal 
or  neglect  to  make  such  return  and  in  cases 
of  false  or  fraudulent  returns,   in  which 
cases  the  Commissioner  of  Internal  Revenue 
shall,  upon  the  discovery  thereof,  at  any 
time  within  three  years  after  said  return  is 
due,  make  a  return  upon  information  ob- 
tained as  above  provided  for  in  this  sec- 
tion or  by  existing  law,  and  the  assessment 
made   by   the   Commissioner   of   Internal 
Revenue  thereon  shall  be  paid  by  such 
person  or  persons  immediately  upon  notifi- 
cation of  the  amount  of  such  assessment; 
and  to  any  sum  or  sums  due  and  unpaid 
after  the  thirtieth  day  of  June  in  any  year, 
and  for  ten  days  after  notice  and  demand 
thereof  by   the   collector,   there   shall  be 
added  the  sum  of  five  per  centum  on  the 
amount  of  tax  unpaid,  and  interest  at  the 
rate  of  one  per  centum  per  month  upon 
said  tax  from  the  time  the  same  became 
due,   except   from  the  estates    of   insane, 
deceased,  or  insolvent  persons. 


82  INCOME   TAX   LAW  EXPLAINED 

The  penalty  was  the  same  in  the  acts  of  1867 
and  of  1870,  the  time  of  payment  being  changed. 
In  the  act  of  1865  it  was  ten  per  cent  without 
the  clause  as  to  interest.  The  words  "notice 
and"  were  added  by  the  act  of  1865,  which 
struck  out  the  words  "for  thirty  days,"  which 
followed  "unpaid"  in  the  third  line  in  the  act 
of  1864.  The  last  part  of  this  paragraph  is  nearly 
identical  with  §  30  of  the  act  of  1894. 

In  1871,  in  United  States  v.  Dollar  Savings 
Bank,  15  Int.  Rev.  Rec.  193,  the  court  said 
that  "the  defendant  was  not  reprehensibly  in 
default,  but  that  its  refusal  to  pay  the  tax 
claimed  was  induced  by  the  inconsistent  action 
and  the  conflicting  opinions  of  the  Internal 
Revenue  Department  as  to  its  liability,  and  its 
reasonable  desire,  therefore,  to  have  this  judi- 
cially determined.  Under  such  circumstances 
interest  ought  not  to  be  exacted." 

The  demand  under  the  act  of  1866  should 
state  the  amount  of  the  tax  and  demand  pay- 
ment therefor.  United  States  v.  Pacific  Rail- 
road, 4  Dill.  71.  See  Magee  v.  Denton,  5 
Blatch.  130.  The  method  adopted  in  case  of  a 
state  statute  imposing  a  tax  with  interest  at  the 
rate  of  twelve  per  cent  until  paid  is  stated  in 
Massachusetts  v.  Western  Union  Tel.  Co.,  145 
U.  S.  40. 


DEDUCTION  AND  PAYMENT  AT  SOURCE   83 

DEDUCTION  AND  PAYMENT  AT  SOURCE  OF 
NORMAL  TAX. 

All  persons,  firms,  co-partnerships,  com- 
panies, corporations,  joint  stock  companies 
or  associations,  and  insurance  companies, 
in  whatever  capacity  acting,  including 
lessees  or  mortgagors  of  real  or  personal 
property,  trustees  acting  in  any  trust  ca- 
pacity, executors,  administrators,  agents, 
receivers,  conservators,  employers,  and  all 
officers  and  employees  of  the  United  States 
having  the  control,  receipt,  custody,  dis- 
posal, or  payment  of  interest,  rent,  sal- 
aries, wages,  premiums,  annuities,  com- 
pensation, remuneration,  emoluments,  or 
other  fixed  or  determinable  annual  gains, 
profits,  and  income  of  another  person,  ex- 
ceeding $3,000  for  any  taxable  year,  other 
than  dividends  on  capital  stock,  or  from 
the  net  earnings  of  corporations  and  joint- 
stock  companies  or  associations  subject 
to  like  tax,  who  are  required  to  make  and 
render  a  return  in  behalf  of  another,  as 


84  INCOME   TAX   LAW   EXPLAINED 

provided  herein,  to  the  collector  of  his, 
her,  or  its  district,  are  hereby  authorized 
and  required  to  deduct  and  withhold 
from  such  annual  gains,  profits,  and  income 
such  sum  as  will  be  sufficient  to  pay  the 
normal  tax  imposed  thereon  by  this  section, 
and  shall  pay  to  the  officer  of  the  United 
States  Government  authorized  to  receive 
the  same;  and  they  are  each  hereby  made 
personally  liable  for  such  tax.  In  all  cases 
where  the  income  tax  of  a  person  is  with- 
held and  deducted  and  paid  or  to  be  paid 
at  the  source,  as  aforesaid,  such  person 
shall  not  receive  the  benefit  of  the  deduc- 
tion and  exemption  allowed  in  paragraph 
C  of  this  section  except  by  an  application 
for  refund  of  the  tax  unless  he  shall,  not 
less  than  thirty  days  prior  to  the  day  on 
which  the  return  of  his  income  is  due,  file 
with  the  person  who  is  required  to  with- 
hold and  pay  tax  for  him,  a  signed  notice 
in  writing  claiming  the  benefit  of  such  ex- 
emption and  thereupon  no  tax  shall  be 
withheld  upon  the  amount  of  such  exemp- 


DEDUCTION  AND  PAYMENT  AT  SOURCE        85 

tion:  Provided,  that  if  any  person  for  the 
purpose  of  obtaining  any  allowance  or 
reduction  by  virtue  of  a  claim  for  such 
exemption,  either  for  himself  or  for  any 
other  person,  knowingly  makes  any  false 
statement  or  false  or  fraudulent  represen- 
tation, he  shall  be  liable  to  a  penalty  of 
$300;  nor  shall  any  person  under  the  fore- 
going conditions  be  allowed  the  benefit 
of  any  deduction  provided  for  in  subsection 
B  of  this  section  unless  he  shall,  not  less 
than  thirty  days  prior  to  the  day  on  which 
the  return  of  his  income  is  due,  either  file 
with  the  person  who  is  required  to  with- 
hold and  pay  tax  for  him  a  true  and  correct 
return  of  his  annual  gains,  profits,  and 
income  from  all  other  sources,  and  also 
the  deductions  asked  for,  and  the  showing 
thus  made  shall  then  become  a  part  of  the 
return  to  be  made  in  his  behalf  by  the  per- 
son required  to  withhold  and  pay  the 
tax,  or  likewise  make  application  for  de- 
ductions to  the  collector  of  the  district 
in  which  return  is  made  or  to  be  made  for 


86  INCOME   TAX   LAW   EXPLAINED 

him:  Provided  further,  that  if  such  person 
is  a  minor  or  an  insane  person,  or  is  absent 
from  the  United  States,  or  is  unable  owing 
to  serious  illness  to  make  the  return  and 
application  above  provided  for,  the  return 
and  application  may  be  made  for  him 
or  her  by  the  person  required  to  withhold 
and  pay  the  tax,  he  making  oath  under  the 
penalties  of  this  act  that  he  has  sufficient 
knowledge  of  the  affairs  and  property 
of  his  beneficiary  to  enable  him  to  make  a 
full  and  complete  return  for  him  or  her, 
and  that  the  return  and  application  made 
by  him  are  full  and  complete:  Provided 
further,  that  the  amount  of  the  normal 
tax  hereinbefore  imposed  shall  be  deducted 
and  withheld  from  fixed  and  determinable 
annual  gains,  profits,  and  income  derived 
from  interest  upon  bonds,  and  mortgages, 
or  deeds  of  trust,  or  other  similar  obli- 
gations of  corporations,  joint-stock  com- 
panies or  associations,  and  insurance  com- 
panies, whether  payable  annually  or  at 
shorter  or  longer  periods,  although  such 


DEDUCTION  AND  PAYMENT  AT  SOURCE   87 

interest  does  not  amount  to  $3,000,  sub- 
ject to  the  provisions  of  this  section  re- 
quiring  the   tax   to   be   withheld   at   the 
source  and  deducted  from  annual  income 
and  paid  to  the  Government;  and  likewise 
the  amount  of  such  tax  shall  be  deducted 
and   withheld   from    coupons,    checks,    or 
bills   of   exchange   for   or   in   payment   of 
interest  upon  bonds  of  foreign  countries 
and  upon  foreign  mortgages  or  like  obli- 
gations (not  payable  in  the  United  States), 
and   also   from   coupons,   checks,   or  bills 
of  exchange  for  or  in  payment  of  any  divi- 
dends upon  the  stock  or  interest  upon  the 
obligations  of  foreign  corporations,   asso- 
ciations, and  insurance  companies  engaged 
in  business  in  foreign  countries;  and  the 
tax  in  each  case  shall  be  withheld  and 
deducted  for  and  in  behalf  of  any  person 
subject  to  the  tax  hereinbefore  imposed, 
although  such  interest,  dividends,  or  other 
compensation  does  not  exceed  $3,000,  by 
any  banker  or  person  who  shall  sell  or 
otherwise  realize  coupons,  checks,  or  bills 


88  INCOME   TAX   LAW   EXPLAINED 

of  exchange  drawn  or  made  in  payment  of 
any  such  interest  or  dividends  (not  pay- 
able in  the  United  States),  and  any  per- 
son who  shall  obtain  payment  (not  in 
the  United  States),  in  behalf  of  another 
of  such  dividends  and  interest  by  means 
of  coupons,  checks,  or  bills  of  exchange, 
and  also  any  dealer  in  such  coupons  who 
shall  purchase  the  same  for  any  such  divi- 
dends or  interest  (not  payable  in  the 
United  States),  otherwise  than  from  a 
banker  or  another  dealer  in  such  coupons; 
but  in  each  case  the  benefit  of  the  exemp- 
tion and  the  deduction  allowable  under 
this  section  may  be  had  by  complying 
with  the  foregoing  provisions  of  this  para- 
graph. 

All  persons,  firms,  or  corporations  un- 
dertaking as  a  matter  of  business  or  for 
profit  the  collection  of  foreign  payments 
of  such  interest  or  dividends  by  means  of 
coupons,  checks,  or  bills  of  exchange  shall 
obtain  a  license  from  the  Commissioner 
of  Internal  Revenue,  and  shall  be  subject 


DEDUCTION  AND  PAYMENT  AT  SOURCE   89 

to  such  regulations  enabling  the  Govern- 
ment to  ascertain  and  verify  the  due  with- 
holding and  payment  of  the  income  tax 
required  to  be  withheld  and  paid  as  the 
Commissioner  of  Internal  Revenue,  with  the 
approval  of  the  Secretary  of  the  Treasury, 
shall  prescribe;  and  any  person  who  shall 
knowingly  undertake  to  collect  such  pay- 
ments as  aforesaid  without  having  ob- 
tained a  license  therefor,  or  without  com- 
plying with  such  regulations,  shall  be 
deemed  guilty  of  a  misdemeanor  and  for 
each  offence  be  fined  in  a  sum  not  exceed- 
ing $5,000,  or  imprisoned  for  a  term  not 
exceeding  one  year,  or  both,  in  the  discretion 
of  the  court. 

Nothing  in  this  section  shall  be  construed 
to  release  a  taxable  person  from  liability 
for  income  tax,  nor  shall  any  contract  en- 
tered into  after  this  act  takes  effect  be  valid 
in  regard  to  any  Federal  Income  Tax  im- 
posed upon  a  person  liable  to  such  pay- 
ment. 

The   tax  herein   imposed  upon   annual 


90  INCOME   TAX   LAW   EXPLAINED 

gains,  profits,  and  income  not  falling  under 
the  foregoing  and  not  returned  and  paid 
by  virtue  of  the  foregoing  shall  be  assessed 
by  personal  return,  under  rules  and  regu- 
lations to  be  prescribed  by  the  Commis- 
sioner of  Internal  Revenue  and  approved 
by  the  Secretary  of  the  Treasury. 

The  provisions  of  this  section  relating 
to  the  deduction  and  payment  of  the  tax 
at  the  source  of  income  shall  only  apply  to 
the  normal  tax  hereinbefore  imposed  upon 
individuals. 

The  above  is  what  is  called  stoppage-at- 
source,  collection-at-source,  or  payment-at- 
source  tax  and  appears  in  only  one  of  the 
former  acts,  that  of  1894.  Corporations  were 
to  deduct  the  tax  from  dividends  and,  in  the 
case  of  public  officials,  the  Government  was 
to  deduct  the  tax  from  their  salaries.  See  §§  28, 
32,  and  33. 

The  origin  of  this  tax  and  the  experiences  of 
other  nations  in  levying  it  are  set  forth  in  Selig- 
man,  36-38,  90-91,  98,  216,  270-271,  312,  324, 
325,  347,  353,  526-527,  659-660.  On  page  661 
he  says,  "In  the  United  States  the  arguments 


DEDUCTION  AND  PAYMENT  AT  SOURCE   91 

in  favor  of  the  stoppage-at-source  income  tax 
are  far  stronger  than  in  Europe,  because  of  the 
peculiar  conditions  of  American  life.  In  the 
first  place,  nowhere  is  corporate  activity  so 
developed,  and  in  no  country  of  the  world 
does  the  ordinary  business  of  the  community 
assume  to  so  overwhelming  an  extent  the  cor- 
porate form.  Not  only  is  a  large  part  of  the 
intangible  wealth  of  individuals  composed  of 
corporate  securities,  but  a  very  appreciable 
part  of  business  profits  consists  of  corporate 
profits.  In  the  second  place,  hi  no  other  im- 
portant country  are  investments  to  so  great 
an  extent  domestic  in  character.  The  one 
great  difficulty  in  England,  as  we  have  learned, 
is  that  connected  with  foreign  securities.  And 
in  France,  where  the  same  difficulty  exists,  we 
have  learned  that  the  projected  control  of 
these  foreign  investments  through  the  French 
bankers  and  agents  forms  the  one  difficult  and 
complicated  point  hi  the  scheme.  In  the 
United  States,  on  the  other  hand,  the  situa- 
tion is  the  reverse.  Instead  of  our  capitalists 
seeking  investments  abroad,  it  is  the  foreign 
capitalist  who  purchases  American  securities. 
We  are,  therefore,  fortunately  exempt  from  the 
chief  embarrassments  which  confronts  Europe; 
and  there  is  every  likelihood  that  this  situa- 
tion will  not  be  changed  for  some  time  to 


92  INCOME   TAX   LAW   EXPLAINED 

come.  The  arguments  that  speak  in  favor  of 
a  stoppage-at-source  income  tax  abroad  hence 
apply  with  redoubled  force  here.  The  stoppage- 
at-source  scheme  lessens,  to  an  enormous  ex- 
tent, the  strain  on  the  administration;  it  works, 
so  far  as  it  is  applicable,  almost  automatically; 
and,  where  enforced,  it  secures  to  the  last  penny 
the  income  that  is  rightfully  due.  Can  there 
really  be  any  doubt  as  to  the  preference  to  be 
given  to  the  stoppage-at-source  income  tax 
over  either  the  lump-sum  or  the  presumptive 
income  tax  under  American  conditions?  " 

On  the  other  hand  this  feature  of  the  present 
bill  is  the  one  which  has  aroused  the  most 
hostility  and  opposition,  and  it  is  the  one  which 
will  doubtless  give  rise  to  the  most  embar- 
rassments. 

The  writer  in  the  Wall  St.  Journ.  in  Art.  VI 
says,  "  Practically  all  public  utility  companies 
are  obliged  to  make  reports  to  State  Boards  of 
Commissioners.  All  railroads  make  reports  to 
state  boards,  as  well  as  to  the  Interstate  Com- 
merce Commission.  To  comply  with  the 
system  adopted  by  the  Interstate  Commerce 
Commission  and  the  state  boards  many  rail- 
roads had  to  modify  their  methods  of  account- 
ing and  of  defining  the  various  items  of  the 
account. 

"  There  is  practical  uniformity  now,  and  to 


DEDUCTION  AND  PAYMENT  AT  SOURCE   93 

introduce  a  new  system  to  comply  with  the 
requirements  of  the  proposed  income  tax  law 
would  cause  endless  confusion.  The  com- 
panies would  find  themselves  compelled  by 
law  to  file  two  sets  of  reports  with  the  United 
States  Government  —  one  with  the  Internal 
Revenue  Department  and  one  with  the  Inter- 
state Commerce  Commission." 

The  same  writer  hi  the  Wall  St.  Journ.  in 
Art.  XIV,  after  discussing  at  length  the  duties 
imposed  on  guardians  and  trustees,  says, 
"As  to  the  first  sort  of  stoppage  (incomes  over 
$3,000  or  $4,000)  all  vital  difficulties  would 
be  wiped  away  if  the  obligation  to  make  re- 
turns on  behalf  of  another  could  be  circum- 
scribed as  herein  suggested,  and  if  income 
should  be  required  to  be  reported  at  its  source, 
without  the  physical  collection  of  the  tax  at 
the  same  time.  This  would  eliminate  all  of 
the  complications  relating  to  deductions,  ex- 
emptions, and  the  duplication  of  returns, 
while  at  the  same  time  the  Government  would 
be  as  sure  of  collecting  the  full  tax  as  if  the  tax 
was  actually  withheld  at  the  source." 

He  further  says,  speaking  of  the  second  sort 
of  stoppage,  1  per  cent  of  all  interest  on  the 
bonds  and  debts  of  corporations,  no  matter 
what  the  amount  of  income,  "Starting  with 
the  premise  that  the  chief  value  in  this  sort  of 


94  INCOME  TAX  LAW  EXPLAINED 

stoppage  is  the  information  derived  therefrom, 
we  suggest  two  simpler  and  cheaper  methods : 

"  Either  (1)  abandon  this  form  of  stoppage 
altogether,  and  rely  on  the  affidavits  of  the 
persons  taxed. 

"Or  (2)  require  the  institution  which  pays 
the  interest  (whether  it  be  the  debtor  corpora- 
tion or  its  paying  agent)  to  retain  1  per  cent 
of  each  interest  payment,  and  remit  it  to  the 
collector  of  the  district,  together  with  a  state- 
ment showing  (a)  to  whom  fully  registered 
bond  interest  was  paid,  and  (6)  for  what  debtor 
corporation  and  in  what  amount  all  the  re- 
mainder of  such  interest  instalment  was  paid. 
Adequate  penalties  should  also  be  imposed 
for  failure  to  comply  with  these  requirements. 
Free  all  other  persons  and  institutions  from 
responsibilities  in  the  matter.  This  method 
will  have  these  advantages :  — 

"(a)  The  first  corporations,  trust  companies, 
or  banks  paying  interest  money,  and  only 
those,  will  be  burdened  with  this  matter,  thus 
reducing  the  volume  of  work  immensely. 

"(6)  The  work  (on  the  part  of  the  Depart- 
ment of  Internal  Revenue)  will  be  much  sim- 
plified by  concentrating  all  data  respecting 
each  debtor  corporation  upon  one  collector." 
See  further  on  this  subject  Arts.  II,  III,  IV. 

The  same  writer  in  the  Wall  St.  Journ.  in 


DEDUCTION  AND  PAYMENT  AT  SOURCE   95 

Art.  XVI  says  that  he  had  previously  raised 
these  objections  to  " collection  at  the  source." 

"1.  That  it  threw  the  burden  of  taxation 
on  the  stockholder  who  paid  the  interest  rather 
than  on  the  bondholder  who  received  the  in- 
come, because  of  the  covenant  in  a  large  major- 
ity of  bonds  which  forbids  the  retention  of  any 
tax  the  company  might  be  called  upon  to 
withhold. 

"2.  It  made  the  stockholder  pay  a  tax  for 
non-taxable  persons,  because  the  tax  levy  was 
on  incomes  in  excess  of  a  certain  amount, 
whereas  the  machinery  of  collection  exacted 
retention  of  a  tax  on  all  incomes. 

"3.  It  exacted  a  tax  on  small  incomes 
where  there  was  no  guaranty  clause,  and  left 
the  recipient  —  though  non-taxable  —  seem- 
ingly without  recourse." 

After  referring  to  the  effort  of  the  Senate 
Caucus  to  meet  the  situation  by  certain 
amendments,  the  writer  says,  "What  the  Wall 
Street  Journal  suggested  was  that  the  paying 
company  be  authorized  by  Congress  to  require 
disclosure  of  the  identity  of  the  owner  of  the 
coupon,  either  by  indorsement  or  otherwise, 
before  payment.  Then  anyone  who  accepted 
an  unindorsed  or  unidentified  coupon  would 
do  so  at  his  peril  and  could  not  claim  ex- 
emption." 


96  INCOME   TAX   LAW   EXPLAINED 

The  writer  says  further  that  the  imposition 
of  a  tax  on  every  bondholder  is  accomplished 
through  these  amendments: 

First,  by  changing  the  levy  from  a  tax  on 
income  "over  and  above  $4,000,"  to  a  tax  on 
income  "except  as  hereinafter  provided."  (See 
A,  subdivision  1.) 

Second,  by  the  amendment  to  the  rules  for 
computing  net  income.  "There  shall  be  al- 
lowed as  deductions  .... 

"Eight,  the  amount  of  income,  the  tax  upon 
which  has  been  paid  or  withheld  for  payment 
at  the  source,"  etc.  (See  B.) 

"Provided,  further,  that  the  amount  of  the 
normal  tax  hereinbefore  imposed  shall  be  de- 
ducted and  withheld  from  fixed  and  deter- 
minable  annual  gains,  etc." 

"Inasmuch  as  the  only  requirement  in  the 
bill  for  deduction  at  the  source  on  incomes  of 
less  than  $3,000  is  in  connection  with  income 
from  bond  or  similar  investments,  it  seems  clear 
from  the  foregoing  quotations  that  it  is  the  in- 
tention of  the  framers  of  the  bill  to  tax  income 
derived  from  bonds  no  matter  how  small  it 
may  be.  It  seems  a  case  of  deliberate  penali- 
zation of  corporate  investment." 

There  is  such  a  lack  of  practical  information 
as  to  procedure  and  rulings  and  decisions  that 
few  suggestions  can  be  given  relative  to  com- 


PENALTIES  97 

pliance  with  the  above  statutory  provisions 
as  to  collection  at  the  source. 

It  is  to  be  noted,  however,  that  the  surtax 
is  to  be  collected  direct  from  persons  with  in- 
comes in  excess  of  $20,000,  and  that  collection 
at  the  source  applies  only  to  incomes  between 
$3,000  or  $4,000  and  $20,000. 

That  those  who  fail  to  make  the  return, 
withhold  the  tax  and  pay  it,  must  themselves 
pay  it. 

That,  in  the  case  of  payment  of  dividends 
by  corporations,  no  deduction  or  return  of  the 
name  of  the  person  to  whom  paid  is  required. 

That  the  persons,  firms,  etc.,  undertaking 
the  collection  of  foreign  payments  of  interest 
and  dividends,  etc.,  must  make  application 
for  license  without  any  notice  from  the  Com- 
missioner of  Internal  Revenue. 

That  no  tax  is  to  be  withheld  at  the  source 
prior  to  November  1,  1913. 

See  further  as  to  collection  at  source,  pp.  83 
et  seq. 

PENALTIES  IN  CASE  OF  REFUSAL  OR  NEG- 
LECT TO  MAKE  RETURN  AND  IN  CASE 
OF  FRAUDULENT  RETURN. 

F.  That  if  any  person,  corporation,  joint- 
stock  company,  association,  or  insurance 


98  INCOME  TAX  LAW  EXPLAINED 

company  liable  to  make  the  return  or  pay 
the  tax  aforesaid  shall  refuse  or  neglect  to 
make  a  return  at  the  time  or  times  herein- 
before specified  in  each  year,  such  person 
shall  be  liable  to  a  penalty  of  not  less  than 
$20  nor  more  than  $1,000.  Any  person 
or  any  officer  of  any  corporation  required 
by  law  to  make,  render,  sign,  or  verify 
any  return  who  makes  any  false  or  fraudu- 
lent return  or  statement  with  intent  to 
defeat  or  evade  the  assessment  required  by 
this  section  to  be  made  shall  be  guilty  of 
a  misdemeanor,  and  shall  be  fined  not  ex- 
ceeding $2,000  or  be  imprisoned  not  ex- 
ceeding one  year,  or  both,  at  the  discretion 
of  the  court,  with  the  costs  of  prosecution. 

This  sub-section  seems  to  be  largely  new. 

Ex  post  facto  laws,  as  applied  to  criminal 
offences,  are  constitutionally  invalid,  but  they 
do  not  apply  to  laws  intended  to  protect  vested 
rights  of  property.  Retrospective  laws  strictly 
apply  only  to  civil  rights  and  remedies,  and 
are  invalid  only  when  they  infringe  upon 
rights  vested  under  existing  laws.  Every  law 


PENALTIES  99 

that  is  to  have  an  operation  before  the  making 
thereof,  as  to  commence  at  an  antecedent  time, 
or  to  save  time  from  the  statute  of  limitations, 
or  to  excuse  acts  which  were  unlawful,  and 
before  committed,  and  the  like,  is  retrospec- 
tive. Calder  v.  Bull,  3  Dallas,  386.  See  also 
Ex  parte  Medley,  134  U.  S.  160;  United  States 
v.  64  Barrels  of  Spirits,  3  Cliff.  308;  Kille  v. 
Reading  Iron  Works,  134  Penn.  St.  225. 

So  a  contract  right  under  a  statute  is  a  vested 
right  which  cannot  be  impaired  by  a  repeal  of 
the  statute.  Steamship  Co.  v.  Joliffe,  2  Wall. 
450;  Koshkonong  v.  Burton,  104  U.  S.  668. 

The  established  rule  appears  to  be  that  a 
forfeiture  takes  place  when  the  offence  is  com- 
mitted, although  in  the  early  case  announcing 
this  rule  Judge  Story  held,  in  a  dissenting 
opinion,  that  a  forfeiture  attached  to  a  thing 
conveys  no  property  therein  to  the  Govern- 
ment until  seizure  made  or  suit  brought. 
United  States  v.  1960  Bags  of  Coffee,  8  Cranch, 
398.  See  United  States  v.  The  Mars,  8  Cranch, 
417. 

It  is  competent  for  Congress  to  impose  taxes 
retrospectively.  Stockdale  v.  Ins.  Cos.,  20  Wall. 
323;  Locke  v.  New  Orleans,  4  Wall.  172. 

A  statute  which,  after  annual  settlements, 
authorized  county  auditors  in  Ohio  to  extend 
back,  for  four  years,  inquiries  as  to  property 


100  INCOME   TAX  LAW   EXPLAINED 

returnable  for  taxation,  was  held  constitu- 
tional. Sturges  v.  Carter,  114  U.  S.  511. 
'  But  penalties  added  for  such  previous  years 
are  within  a  constitutional  prohibition  against 
retroactive  laws.  Gager  v.  Prout,  48  Ohio  St. 
89;  Ryan  v.  State,  5  Neb.  276. 

So  penalties  which  have  accrued  for  non- 
payment of  a  tax,  but  which  have  been  swept 
away  by  a  repeal  of  the  tax  law,  cannot  be 
revived  by  new  legislation.  State  v.  Jersey 
City,  37  N.  J.  Law,  39. 

An  additional  penalty  may  lawfully  be  pre- 
scribed for  an  act  previously  unlawful.  Mackey 
v.  Holmes,  52  Fed.  Rep.  722. 

The  penalty  of  one  hundred  per  cent  im- 
posed by  the  act  of  1867  for  fraudulent  omis- 
sion of  taxable  property  from  a  return,  could 
not  be  collected  if  the  reassessment  included  a 
sum  not  legally  taxed,  or  until  the  assessor  had 
himself  adjudged  the  omission  to  be  false  and 
fraudulent,  and  the  penalty  to  have  been  in- 
curred. Michigan  Central  R.  Co.  v.  Slack, 
Holmes,  231. 

Only  one  penalty  is  recoverable  for  all  failures 
to  make  the  required  return  prior  to  the  com- 
mencement of  a  suit  to  recover  the  penalties  for 
such  failure.  United  States  v.  Brooklyn  City 
&  N.  R.  Co.,  14  Fed.  Rep.  294;  United  States 
v.  New  York  Guaranty  Co.,  8  Ben.  269. 


CORPORATION   TAX;  'EXEMPTIONS          101 

CORPORATION   TAX  —  WHAT   CORPORA- 
TIONS ARE  EXEMPT. 

[The  provisions  as  to  the  corporation  tax 
in  the  act  of  1894,  §  32,  were  much  narrower 
than  those  of  the  act  approved  August  5,  1909, 
known  as  "The  Corporation  Tax"  law  (36 
U.  S.  Sts.  at  Large,  c.  6,  pages  11,  112-117). 
Said  §  32  was  largely  new.  However,  §  120 
of  the  act  of  1864,  which  imposed  a  duty  of 
five  per  cent  on  dividends  in  scrip  or  money, 
was  not  materially  changed  by  later  acts.  By 
§  15  of  the  act  of  1870  there  was  to  be  levied 
and  collected  for  and  during  1871  "a  tax  of 
two  and  one  half  per  centum  on  the  amount  of 
all  interest  or  coupons  paid  on  bonds  or  other 
evidences  of  debt  issued  and  payable  in  one 
or  more  years  after  date,  by"  a  portion  of  the 
corporations  named  in  §  32  of  the  act  of  1894, 
"and  on  the  amount  of  all  dividends  of  earn- 
ings, income,  or  gains,"  declared  by  them. 
The  present  act  is  largely  founded  on  that  of 
1909.] 

G.  (a)  That  the  normal  tax  herein- 
before imposed  upon  individuals  likewise 
shall  be  levied,  assessed,  and  paid  annually 
upon  the  entire  net  income  arising  or 


102  INCOME   TAX   LAW   EXPLAINED 

accruing  from  all  sources  during  the  pre- 
ceding calendar  year  to  every  corpora- 
tion, joint-stock  company,  or  association, 
and  every  insurance  company,  organized 
in  the  United  States,  no  matter  how  cre- 
ated or  organized,  not  including  partner- 
ships; but  if  organized,  authorized,  or 
existing  under  the  laws  of  any  foreign 
country,  then  upon  the  amount  of  net 
income  accruing  from  business  transacted 
and  capital  invested  within  the  United 
States  during  such  year:  Provided  however, 
that  nothing  in  this  section  shall  apply 
to  labor,  agricultural,  or  horticultural  or- 
ganizations, or  to  mutual  savings  banks 
not  having  a  capital  stock  represented  by 
shares,  or  to  fraternal  beneficiary  soci- 
eties, orders,  or  associations  operating  under 
the  lodge  system  or  for  the  exclusive  bene- 
fit of  the  members  of  a  fraternity  itself 
operating  under  the  lodge  system,  and 
providing  for  the  payment  of  life,  sick, 
accident,  and  other  benefits  to  the  members 
of  such  societies,  orders,  or  associations 


CORPORATION  TAX;   EXEMPTIONS          103 

and  dependents  of  such  members,  nor  to 
domestic  building  and  loan  associations, 
nor  to  cemetery  companies,  organized  and 
operated  exclusively  for  the  mutual  benefit 
of  their  members,  nor  to  any  corporation 
or  association  organized  and  operated  ex- 
clusively for  religious,  charitable,  scientific, 
or  educational  purposes,  no  part  of  the 
net  income  of  which  inures  to  the  benefit 
of  any  private  stockholder  or  individual, 
nor  to  business  leagues,  nor  to  chambers 
of  commerce  or  boards  of  trade,  not  or- 
ganized for  profit  or  no  part  of  the  net 
income  of  which  inures  to  the  benefit  of  the 
private  stockholder  or  individual;  nor  to 
any  civic  league  or  organization  not  or- 
ganized for  profit,  but  operated  exclu- 
sively for  the  promotion  of  social  welfare; 
Provided  further,  that  there  shall  not 
be  taxed  under  this  section  any  income, 
derived  from  any  public  utility  or  from  the 
exercise  of  any  essential  governmental 
function  accruing  to  any  State,  Territory, 
or  the  District  of  Columbia,  or  any  po- 


104  INCOME   TAX   LAW   EXPLAINED 

litical  subdivision  of  a  State,  Territory,  or 
the  District  of  Columbia,  nor  any  income 
accruing  to  the  government  of  the  Philip- 
pine Islands  or  Porto  Rico,  or  of  any  po- 
litical subdivision  of  the  Philippine  Islands 
or  Porto  Rico:  Provided,  that  whenever 
any  State,  Territory,  or  the  District  of 
Columbia,  or  any  political  subdivision  of  a 
State  or  Territory  has,  prior  to  the  pas- 
sage of  this  act,  entered  in  good  faith  into 
a  contract  with  any  person  or  corpora- 
tion, the  object  and  purpose  of  which  is  to 
acquire,  construct,  operate  or  maintain 
a  public  utility,  no  tax  shall  be  levied 
under  the  provisions  of  this  act  upon  the 
income  derived  from  the  operation  of  such 
public  utility,  so  far  as  the  payment 
thereof  will  impose  a  loss  or  burden  upon 
such  State,  Territory,  or  the  District  of 
Columbia,  or  a  political  subdivision  of  a 
State  or  Territory;  but  this  provision  is 
not  intended  to  confer  upon  such  person 
or  corporation  any  financial  gain  or  exemp- 
tion or  to  relieve  such  person  or  corpora- 


COKPORATION  TAX;   EXEMPTIONS          105 

tion  from  the  payment  of  a  tax  as  pro- 
vided for  in  this  section  upon  the  part  or 
portion  of  the  said  income  to  which  such 
person  or  corporation  shall  be  entitled 
under  such  contract. 

The  first  part  of  the  first  paragraph  of  §  38 
of  the  act  of  1909  differs  somewhat  from 
the  above.  It  provides  that  every  corpora- 
tion, etc.,  organized  for  profit  and  having  a 
capital  stock  represented  by  shares,  and  every 
insurance  company  organized  here  or  under 
the  laws  of  any  foreign  country  and  engaged 
in  business  here  shall  pay  annually  a  special 
excise  tax  equivalent  to  one  per  centum  upon  the 
entire  net  income  over  $5,000,  received  from  all 
sources,  exclusive  of  amounts  received  as  divi- 
dends from  other  corporations,  etc.,  subject 
to  the  tax  hereby  imposed,  or  if  organized 
abroad,  upon  the  amount  of  net  income  over 
$5,000,  received  here,  exclusive  of  amounts  so 
received  as  dividends  upon  stock  of  other 
corporations,  etc.,  subject  to  the  tax  hereby 
imposed. 

The  part  of  the  above  paragraph  of  the  pres- 
ent act  enumerating  exemptions  is  far  broader 
than  the  provision  in  the  act  of  1909.  In  the 
present  act  all  after  the  words  "  inures  to  the 


106  INCOME  TAX  LAW  EXPLAINED 

benefit   of    the  private  stockholder   or  indi- 
vidual" is  new. 

The  following  decisions  and  rulings  relate  to 
§  38  of  the  act  approved  August  5, 1909,  known 
as  "The  Corporation  Tax"  law,  36  U.  S.  Sts.  at 
Large,  c.  6,  pages  11,  112-117.  The  constitu- 
tional validity  of  this  law  was  declared  in  Flint 
v.  Stone  Tracy  Co.,  220  U.  S.  107. 

"  Corporations  organized  for  the  purpose  of 
doing  business,  and  actually  engaged  in  such 
activities  as  leasing  property,  collecting  rents, 
managing  office  buildings,  making  investments 
of  profits,  or  leasing  ore  lands  and  collecting 
royalties,  managing  wharves,  dividing  profits, 
and  in  some  cases  investing  the  surplus,  are 
engaged  in  business  within  the  meaning  of  this 
statute,  and  in  the  capacity  necessary  to  make 
such  organizations  subject  to  the  law."  So  of 
companies  owning  and  leasing  taxicabs  and  col- 
lecting rents  therefrom.  So  of  public  service 
corporations  providing  means  of  transporta- 
tion and  supplying  artificial  light,  water,  and 
the  like.  Flint  v.  Stone  Tracy  Co.,  220  U.  S. 
107,  171,  172. 

Foreign  steamship  companies  engaged  in  the 
business  of  transporting  passengers,  goods,  and 
merchandise  between  ports  in  this  country  and 
foreign  ports,  and  maintaining  passenger  and 


COKPOBATION   TAX;   EXEMPTIONS          107 

freight  agencies  in  this  country  are  corporations 
subject  to  tax.    28  Atty.  Gen.  Op.  211. 

Companies  organized  under  a  declaration  of 
trust  to  improve  and  hold  real  estate,  the  title 
to  which  is  vested  exclusively  in  trustees  re- 
movable by  vote  of  the  stockholders,  and  the 
stock  being  transferable,  which  companies 
possess  all  of  the  essential  elements  of  a  common 
law  joint  stock  company,  are  " joint  stock 
companies  or  associations  organized  for  profit 
and  having  a  capital  stock  represented  by 
shares,"  organized  under  the  laws  of  a  state 
and  are  amenable  to  the  tax.  28  Atty.  Gen. 
Op.  234. 

A  trust  formed  in  a  State,  where  statutory 
joint  stock  companies  are  unknown,  for  the 
purpose  of  purchasing,  improving,  holding,  and 
selling  land,  and  which  does  not  have  perpetual 
succession,  but  ends  with  lives  in  being  and 
twenty  years  thereafter,  is  not  within  the  pro- 
visions of  this  statute.  Eliot  v.  Freeman,  220 
U.  S.  178.  So  of  a  corporation,  the  sole  pur- 
pose of  which  is  to  hold  title  to  a  single  parcel 
of  real  estate  subject  to  a  long  lease  and,  for 
convenience  of  the  stockholders,  to  receive  and 
distribute  the  rentals  arising  from  such  lease 
and  proceeds  of  disposition  of  the  land,  and 
which  has  disqualified  itself  from  doing  any 
other  business.  Zonne  v.  Minneapolis  Syndi- 


108  INCOME   TAX   LAW   EXPLAINED 

cate,  220  U.  S.  187.  So  a  corporation  organized 
to  take  over  real  estate  and  leasehold  interests 
owned  by  a  dry  goods  corporation,  leasing 
such  property  to  the  dry  goods  corporation, 
collecting  rents,  and  distributing  them  among 
its  stockholders,  and  which  has  executed  a  lease 
to  the  dry  goods  corporation  and  surrendered 
the  management,  is  not  subject  to  the  tax,  al- 
though it  was  organized  under  a  law  relative 
to  the  organization  of  business  corporations  for 
profit.  Emery  Realty  Co.  v.  United  States,  198 
Fed.  Rep.  242.  If  property  owned  by  a  cor- 
poration cannot  be  directly  taxed  if  owned  by 
an  individual,  it  cannot  be  so  taxed  by  virtue 
of  its  corporate  ownership.  Same  case. 

Where  a  corporation  was  organized  to  own 
the  stock  of  a  mining  company,  and  had  no 
assets  except  such  stock,  a  small  amount  in 
bank  and  office  furniture,  etc.,  and  did  nothing 
other  than  receive  dividends  from  the  operat- 
ing company  and  distribute  them  as  such  among 
its  own  stockholders,  it  was  held  not  subject 
to  the  tax.  But  the  judgment  awarded  the 
company  upon  a  counter  claim  in  an  action 
brought  to  recover  a  tax  assessed  under  the 
Corporation  Tax  Law  was  reversed.  United 
States  v.  Nipissing  Mines  Co.,  206  Fed.  Rep. 
431. 

A  railroad  corporation,  which  has  leased  its 


COKPORATION  TAX;  EXEMPTIONS          109 

property  for  a  term  of  years  and  parted  with  its 
control  and  management,  but  which  maintains 
its  corporate  organization  and  collects  rentals 
from  the  lessee  company  and  distributes  the 
same  among  its  stockholders,  is  not  "  engaged 
in  business"  within  the  meaning  of  the  act  and 
is  not  liable  for  taxes  thereunder,  notwithstand- 
ing the  lease  provides  for  recovery  of  property 
in  case  of  default.  The  receipt  of  income  by 
the  lessor  from  invested  funds  and  the  distribu- 
tion thereof  among  the  stockholders,  and  pay- 
ment of  expenses  of  office  and  of  salaries  of 
officers,  etc.,  does  not  constitute  such  a  busi- 
ness as  is  taxable.  McCoach  v.  Minehill  R. 
Co.,  228  U.  S.  295;  192  Fed.  Rep.  670. 

Certain  individuals  owning  the  business  of  a 
department  store  also  owned  the  real  estate 
rented  by  a  firm  operating  the  department 
store,  and,  in  order  to  control  the  real  estate, 
lease,  rents,  etc.,  more  conveniently,  organized 
the  plaintiff  corporation,  of  which  they  owned 
the  stock,  under  the  New  York  Business  Cor- 
porations Law.  The  corporation  was  first  au- 
thorized to  buy,  sell,  rent,  and  exchange  real 
property,  build,  construct,  and  alter  houses 
thereon,  manage  and  develop  property,  deal  in 
goods,  wares,  and  merchandise,  and  carry  on 
any  business  connected  therewith,  etc.  It  in 
fact  did  no  business,  except  own  and  operate 


110  INCOME   TAX   LAW   EXPLAINED 

the  real  property  in  question,  and  on  December 
26,  1911,  amended  its  certificate  of  incorpora- 
tion, so  as  to  limit  its  powers  to  the  mere  own- 
ership and  rental  of  such  property,  with  a  dis- 
tribution of  the  proceeds.  It  was  held  that  the 
plaintiff  had  no  property  right  in  the  form  of  a 
business  privilege,  and  was  not  doing  business, 
so  as  to  be  taxable.  Abrast  Realty  Co.  v. 
Maxwell,  206  Fed.  Rep.  333. 

The  plaintiff  having  been  assessed  for  corpo- 
ration taxes  in  January,  1912,  and  the  same  not 
having  been  paid,  a  writ  of  distraint  was  issued 
by  the  collector,  and  the  corporation  having 
been  notified  that  the  tax  would  be  collected 
by  levy,  the  deputy  collector  took  from  a  rep- 
resentative of  the  corporation  the  amount  of 
the  tax,  against  the  verbal  protest  of  the  cor- 
porate officer  at  the  time,  and  a  written  notice 
of  protest  then  served,  in  which  the  corporation 
denied  that  it  was  liable  to  the  tax.  It  was  held 
that  the  protest  was  sufficient  to  entitle  the 
corporation  to  recover  the  amount  from  the 
collector,  on  its  being  determined  that  the  cor- 
poration was  not  within  the  law.  Abrast 
Realty  Co.  v.  Maxwell,  206  Fed.  Rep.  333. 

Under  Rev.  Sts.  §§  3224,  3226,  conferring 
on  a  party  who  has  paid  a  tax  to  the  United 
States  under  protest  the  right  to  sue  for  its 
recovery,  and  forbidding  the  maintenance  of 


CORPORATION   TAX;   EXEMPTIONS          111 

any  suit  to  restrain  the  assessment  or  collec- 
tion of  taxes  by  the  United  States,  a  corpora- 
tion had  an  adequate  remedy  at  law  to  recover 
internal  revenue  taxes  assessed  against  its  in- 
come under  the  act  of  August  5, 1909,  and  hence 
a  stockholder  could  not  maintain  a  suit  to  re- 
strain the  corporation  from  paying  the  tax  on 
the  ground  that  the  corporation  was  not  sub- 
ject to  assessment.  Straus  v.  Abrast  Realty 
Co.,  200  Fed.  Rep.  327. 

The  tax  imposed  by  this  section  was  not  in- 
tended to  include  insolvent  corporations  with 
no  net  income  whose  properties  are  being  ad- 
ministered by  a  court.  Pennsylvania  Steel  Co. 
v.  New  York  City  R.  Co.,  176  Fed.  Rep.  471. 

The  tax  "with  respect  to  carrying  on  or 
doing  business  by"  corporations,  etc.,  is  one 
upon  doing  business  in  a  corporate  capacity, 
and  receivers  of  an  insolvent  corporation  not 
doing  business  when  the  act  was  passed  and 
having  done  no  business  since  are  not  within 
the  act.  Pennsylvania  Steel  Co.  v.  New  York 
City  R.  Co.,  198  Fed.  Rep.  774. 

The  act  does  not  include  the  property  of 
street  railroad  companies  in  the  hands  of  re- 
ceivers appointed  by  federal  courts,  notwith- 
standing the  property  seized  does  not  include 
the  franchise  to  be  a  corporation  and  its  organi- 
zation is  maintained.  Pennsylvania  Steel  Co. 


112  INCOME   TAX   LAW   EXPLAINED 

v.  New  York  City  R.  Co.,  193  Fed.  Rep.  286; 
176  Id.  471. 

Mining  corporations  are  included  in  the  act. 
Stratton's  Independence  v.  Howbert,  23  Treas. 
Decis.  (1796).  A  corporation  organized  under 
the  laws  of  New  Jersey,  but  doing  business  in 
Cuba,  was  held  liable  to  tax  in  25  Treas.  Decis. 
(1863).  So  also  a  corporation  organized  under 
the  laws  of  New  Jersey  and  doing  business 
wholly  within  the  Philippine  Islands.  29  Atty. 
Gen.  Op.  164. 

Under  24  St.  505,  as  amended  by  36  St.  1087, 
1168,  the  suit  to  recover  taxes  may  be  brought 
against  the  United  States  instead  of  against  the 
collector  of  internal  revenue.  Emery  Realty 
Co.  v.  United  States,  198  Fed.  Rep.  242.  A 
corporation  to  be  subject  to  the  tax  must  be 
organized  to  do  business  and  must  be  engaged 
in  it.  Same  case,  242. 

The  tax  must  be  strictly  construed  and  all 
reasonable  doubts  must  be  against  the  govern- 
ment. Mutual  Benefit  Ins.  Co.  v.  Herold,  198 
Fed.  Rep.  199;  Parkview  B'ld'g  Ass'n  v. 
Herold,  203  Fed.  Rep.  876. 

Corporations  engaged  in  business  after  Au- 
gust 5,  1909,  but  dissolved  before  December  31, 
1909,  were  held  liable  to  the  tax.  28  Atty. 
Gen.  Op.  241. 

Assets  of  a  corporation  are  subject  to  the  tax 


COKPOKATION   TAX;   EXEMPTIONS          113 

lien  created  by  U.  S.  Rev.  Sts.  §  3186  as  amended 
by  the  act  of  March  1, 1879.  If  the  corporation 
is  dissolved  before  the  taxes  become  due  and 
no  lien  attaches  to  its  assets,  the  tax  may  be 
collected  by  the  Government  by  pursuing  the 
assets  into  the  hands  of  the  stockholders,  in  the 
same  manner  as  any  other  creditor  might  obtain 
satisfaction  of  his  debt.  28  Atty.  Gen.  Op.  241 ; 
19  Treas.  Decis.  (1615).  By  the  act  of  March  4, 
1913,  c.  166,  §  3186  was  amended  so  as  to  read 
as  follows:  "SEC.  3186.  If  any  person  liable 
to  pay  any  tax  neglects  or  refuses  to  pay  the 
same  after  demand,  the  amount  shall  be  a  lien  in 
favor  of  the  United  States  from  the  time  when 
the  assessment  list  was  received  by  the  collector, 
except  when  otherwise  provided,  until  paid,  with 
the  interest,  penalties,  and  costs  that  may 
accrue  in  addition  thereto  upon  all  property  and 
rights  to  property  belonging  to  such  person: 
Provided,  however,  That  such  lien  shall  not  be 
valid  as  against  any  mortgagee,  purchaser,  or 
judgment  creditor  until  notice  of  such  lien  shall 
be  filed  by  the  collector  in  the  office  of  the  clerk 
of  the  district  court  of  the  district  within  which 
the  property  subject  to  such  lien  is  situated: 
Provided  further,  Whenever  any  state  by  appro- 
priate legislation  authorizes  the  filing  of  such 
notice  in  the  office  of  the  registrar  or  recorder  of 
deeds  of  the  counties  of  that  state,  or  in  the  State 


114  INCOME   TAX   LAW   EXPLAINED 

of  Louisiana  in  the  parishes  thereof,  then  such 
lien  shall  not  be  valid  in  that  state  as  against  any 
mortgagee,  purchaser,  or  judgment  creditor, 
until  such  notice  shall  be  filed  in  the  office  of 
the  registrar  or  recorder  of  deeds  of  the  county 
or  counties,  or  parish  or  parishes  in  the  State 
of  Louisiana,  within  which  the  property  sub- 
ject to  the  lien  is  situated." 

A  corporation  which  has  continued  in  busi- 
ness through  a  calendar  year  cannot  evade  the 
tax  by  dissolving  before  the  time  when  required 
to  make  a  return,  and  the  officers  must  make 
such  return.  United  States  v.  General  In- 
spection Co.,  192  Fed.  Rep.  223.  See  General 
Inspection  Co.  v.  United  States,  24  Treas. 
Decis.  (1850). 

"A  certificate  from  the  Secretary  of  State  un- 
der the  laws  of  which  the  corporation  was  organ- 
ized that  the  corporation  had  complied  with 
the  requirements  of  the  laws  of  the  State  neces- 
sary to  effect  its  legal  dissolution  is  consid- 
ered the  best  evidence"  of  such  legal  dissolu- 
tion. 20  Treas.  Decis.  (1673). 

In  Pacific  B'ld'g  &  Loan  Ass'n  v.  Hartson, 
201  Fed.  Rep.  1011,  it  was  held  that  the  plain- 
tiff was  not  "  organized  .  .  .  exclusively  for 
the  mutual  benefit  of  the  members,  no  part  of 
the  net  income  of  which  inures  to  the  benefit 
of  any  private  stockholders  or  individuals." 


CORPOKATION   TAX;   EXEMPTIONS         115 

If  a  corporation  is  not  organized  for  profit 
and  its  method  of  doing  business  is  purely  of  a 
mutual  character,  there  is  no  liability.  21 
Treas.  Decis.  (1713). 

In  Parkview  B'ld'g  Ass'n  v.  Herold,  203  Fed. 
Rep.  876,  a  building  and  loan  association  was 
held  to  be  for  the  mutual  benefit  of  its  members 
and  hence  exempt,  though  under  its  plan  of 
operation  there  might  be  inequality  in  the 
returns  to  the  prepaying  stockholder,  etc., 
since  the  word  "mutual"  was  not  to  be  con- 
strued as  synonymous  with  "equal." 

Instructions  as  to  when  names  of  corpora- 
tions should  be  removed  from  lists  of  corpora- 
tions are  given  in  20  Treas.  Decis.  (1673). 

Some  of  the  decisions  on  the  early  statutes 
may  possibly  be  made  to  apply  to  the  present 
law.  They  are  collected  in  Foster  &  Abbot, 
331  et  seq. 

It  should  particularly  be  borne  in  mind  that 
the  act  of  1909  was  a  special  excise  tax  law  and 
under  it  corporations  were  required  to  be  organ- 
ized for  profit  and  have  a  capital  stock  repre- 
sented by  shares,  etc.,  to  be  taxable.  The 
present  act  provides  that  "the  normal  tax  .  .  . 
shall  be  levied,  etc.,  upon  the  entire  net  income 
arising  or  accruing  from  all  sources,"  etc. 
Hence  many  corporations  declared  in  the  above- 
cited  decisions  to  be  exempt  from  taxation 


116  INCOME   TAX  LAW  EXPLAINED 

under  the  act  of  1909  are  taxable  under  the 
present  act. 

Valuable  notes  on  the  corporations,  organi- 
zations, etc.,  exempt  from  taxation,  as  provided 
above  in  G  (a),  are  given  in  Speer,  33-36. 

NET  INCOME  OF  DOMESTIC  AND  FOREIGN 
CORPORATIONS  —  DEDUCTIONS. 

(b)  Such  net  income  shall  be  ascer- 
tained by  deducting  from  the  gross  amount 
of  the  income  of  such  corporation,  joint- 
stock  company  or  association,  or  insur- 
ance company,  received  within  the  year 
from  all  sources,  (first)  all  the  ordinary 
and  necessary  expenses  paid  within  the 
year  in  the  maintenance  and  operation  of 
its  business  and  properties,  including  rentals 
or  other  payments  required  to  be  made 
as  a  condition  to  the  continued  use  or  pos- 
session of  property;  (second)  all  losses 
actually  sustained  within  the  year  and  not 
compensated  by  insurance  or  otherwise, 
including  a  reasonable  allowance  for  de- 
preciation by  use,  wear  and  tear  of  prop- 
erty, if  any;  and  in  the  case  of  mines  a 


NET   INCOME;   DEDUCTIONS  117 

reasonable  allowance  for  depletion  of  ores 
and  all  other  natural  deposits,  not  to 
exceed  five  per  centum  of  the  gross  value 
at  the  mine  of  the  output  for  the  year 
for  which  the  computation  is  made;  and 
in  case  of  insurance  companies  the  net 
addition,  if  any,  required  by  law  to  be 
made  within  the  year  to  reserve  funds 
and  the  sums  other  than  dividends  paid 
within  the  year  on  policy  and  annuity 
contracts:  Provided,  that  mutual  fire  in- 
surance companies  requiring  their  mem- 
bers to  make  premium  deposits  to  pro- 
vide for  losses  and  expenses  shall  not 
return  as  income  any  portion  of  the  pre- 
mium deposits  returned  to  their  policy- 
holders,  but  shall  return  as  taxable  in- 
come all  income  received  by  them  from 
all  other  sources  plus  such  portions  of  the 
premium  deposits  as  are  retained  by  the 
companies  for  purposes  other  than  the 
payment  of  losses  and  expenses  and  re- 
insurance reserves:  Provided  further,  that 
mutual  marine  insurance  companies  shall 


118  INCOME   TAX   LAW   EXPLAINED 

include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by 
them  less  amounts  paid  for  reinsurance, 
but  shall  be  entitled  to  include  in  deduc- 
tions from  gross  income  amounts  repaid 
to  policy-holders  on  account  of  premiums 
previously  paid  by  them  and  interest 
paid  upon  such  amounts  between  the 
ascertainment  thereof  and  the  payment 
thereof  and  life  insurance  companies  shall 
not  include  as  income  in  any  year  such 
portion  of  any  actual  premium  received 
from  any  individual  policy-holder  as  shall 
have  been  paid  back  or  credited  to  such 
individual  policy-holder,  or  treated  as  an 
abatement  of  premium  of  such  individual 
policy-holder,  within  such  year;  (third) 
the  amount  of  interest  accrued  and  paid 
within  the  year  on  its  indebtedness  to 
an  amount  of  such  indebtedness  not  ex- 
ceeding one-half  of  the  sum  of  its  interest 
bearing  indebtedness  and  its  paid-up  cap- 
ital stock  outstanding  at  the  close  of  the 
year,  or  if  no  capital  stock,  the  amount 


NET   INCOME;   DEDUCTIONS  119 

of  interest  paid  within  the  year  on  an 
amount  of  its  indebtedness  not  exceeding 
the  amount  of  capital  employed  in  the 
business  at  the  close  of  the  year:  Provided, 
that  in  case  of  indebtedness  wholly  se- 
cured by  collateral  the  subject  of  sale  in 
ordinary  business  of  such  corporation,  joint- 
stock  company,  or  association,  the  total 
interest  secured  and  paid  by  such  company, 
corporation,  or  association  within  the  year 
on  any  such  indebtedness  may  be  deducted 
as  a  part  of  its  expense  of  doing  business: 
Provided  further ,  that  in  the  case  of  bonds 
or  other  indebtedness,  which  have  been 
issued  with  a  guaranty  that  the  interest 
payable  thereon  shall  be  free  from  taxation, 
no  deduction  for  the  payment  of  the  tax 
herein  imposed  shall  be  allowed;  and  in 
the  case  of  a  bank,  banking  association, 
loan,  or  trust  company,  interest  paid 
within  the  year  on  deposits  or  on  moneys 
received  for  investment  and  secured  by 
interest-bearing  certificates  of  indebted- 
ness issued  by  such  bank,  banking  asso- 


120  INCOME   TAX   LAW   EXPLAINED 

ciation,  loan  or  trust  company;  (fourth) 
all  sums  paid  by  it  within  the  year  for 
taxes  imposed  under  the  authority  of  the 
United  States  or  of  any  State  or  Terri- 
tory thereof,  or  imposed  by  the  Govern- 
ment of  any  foreign  country:  Provided, 
that  in  the  case  of  a  corporation,  joint- 
stock  company  or  association,  or  insurance 
company,  organized,  authorized,  or  exist- 
ing under  the  laws  of  any  foreign  country, 
such  net  income  shall  be  ascertained  by  de- 
ducting from  the  gross  amount  of  its  in- 
come accrued  within  the  year  from  busi- 
ness transacted  and  capital  invested  within 
the  United  States,  (first)  all  the  ordi- 
nary and  necessary  expenses  actually  paid 
within  the  year  out  of  earnings  in  the  main- 
tenance and  operation  of  its  business  and 
property  within  the  United  States,  in- 
cluding rentals  or  other  payments  re- 
quired to  be  made  as  a  condition  to  the 
continued  use  or  possession  of  property; 
(second)  all  losses  actually  sustained  within 
the  year  in  business  conducted  by  it 


NET  INCOME;  DEDUCTIONS  121 

within  the  United  States  and  not  compen- 
sated by  insurance  or  otherwise,  including 
a  reasonable  allowance  for  depreciation  by 
use,  wear  and  tear  of  property,  if  any, 
and  in  the  case  of  mines  a  reasonable  al- 
lowance for  depletion  of  ores  and  all  other 
natural  deposits,  not  to  exceed  five  per 
centum  of  the  gross  value  at  the  mine 
of  the  output  for  the  year  for  which 
the  computation  is  made;  and  in  case  of 
insurance  companies  the  net  addition,  if 
any,  required  by  law  to  be  made  within 
the  year  to  reserve  funds  and  the  sums 
other  than  dividends  paid  within  the  year 
on  policy  and  annuity  contracts:  Provided 
further,  that  mutual  fire  insurance  com- 
panies requiring  their  members  to  make 
premium  deposits  to  provide  for  losses  and 
expenses  shall  not  return  as  income  any 
portion  of  the  premium  deposits  returned 
to  their  policy-holders,  but  shall  return  as 
taxable  income  all  income  received  by 
them  from  all  other  sources  plus  such 
portions  of  the  premium  deposits  as  are 


122  INCOME   TAX   LAW   EXPLAINED 

retained  by  the   companies  for  purposes 
other  than  the  payment  of  losses  and  ex- 
penses and  reinsurance  reserves:  Provided 
further,  that  mutual  marine  insurance  com- 
panies   shall    include    in    their    return    of 
gross    income    gross    premiums    collected 
and  received  by  them  less  amounts  paid 
for  reinsurance,  but  shall  be  entitled  to 
include  in  deductions  from  gross  income 
amounts  repaid  to  policy-holders  on  account 
of    premiums    previously    paid   by    them, 
and    interest    paid    upon    such    amounts 
between    the    ascertainment    thereof    and 
the   payment   thereof   and   life   insurance 
companies  shall  not  include  as  income  in 
any  year  such  portion  of  any  actual  pre- 
mium received  from  any  individual  policy- 
holder  as  shall  have  been  paid  back  or 
credited  to  such  individual  policy-holder, 
or  treated  as  an  abatement  of  premium 
of  such  individual  policy-holder  within  such 
year;  (third)  the  amount  of  interest  accrued 
and  paid  within  the  year  on  its  indebted- 
ness to  an  amount  of  such  indebtedness 


NET  INCOME;   DEDUCTIONS  123 

not  exceeding  the  proportion  of  one-half 
of  the  sum  of  its  interest  bearing  indebted- 
ness and  its  paid-up  capital  stock  out- 
standing at  the  close  of  the  year,  or  if 
no  capital  stock,  the  capital  employed 
in  the  business  at  the  close  of  the  year 
which  the  gross  amount  of  its  income 
for  the  year  from  business  transacted  and 
capital  invested  within  the  United  States 
bears  to  the  gross  amount  of  its  income 
derived  from  all  sources  within  and  without 
the  United  States:  Provided,  that  in  the 
case  of  bonds  or  other  indebtedness  which 
have  been  issued  with  a  guaranty  that 
the  interest  payable  thereon  shall  be  free 
from  taxation,  no  deduction  for  the  pay- 
ment of  the  tax  herein  imposed  shall  be 
allowed;  (fourth)  all  sums  paid  by  it 
within  the  year  for  taxes  imposed  under 
the  authority  of  the  United  States  or  of  any 
State  or  Territory  thereof  or  the  District 
of  Columbia.  In  the  case  of  assessment  in- 
surance companies,  whether  domestic  or 
foreign,  the  actual  deposit  of  sums  with 


124  INCOME  TAX  LAW  EXPLAINED 

State  or  Territorial  officers,  pursuant  to 
law,  as  additions  to  guarantee  or  reserve 
funds  shall  be  treated  as  being  payments 
required  by  law  to  reserve  funds. 

In  regard  to  the  provision  beginning  with 
(first)  in  the  act  of  1909,  " actually"  appears 
after  " expenses"  and  "out  of  income"  after 
"year";  and  the  clause  "including  all  charges 
such  as  rentals  or  franchise  payments"  is  in 
the  present  act  "including  rentals  or  other 
payments." 

In  regard  to  the  provision  beginning  with 
(second)  in  the  present  act  the  words  "by  use, 
wear  and  tear"  after  "depreciation"  and  the 
clause  as  to  mines  are  new.  The  order  of  the 
last  clause  as  to  insurance  companies  is  changed, 
and  the  provisions  which  follow  as  to  mutual 
fire  and  marine  and  as  to  life  insurance  com- 
panies are  new. 

The  provision  (third)  in  the  act  of  1909  is  as 
follows:  "(third)  interest  actually  paid  within 
the  year  on  its  bonded  or  other  indebtedness 
to  an  amount  of  such  bonded  and  other  in- 
debtedness not  exceeding  the  paid-up  capital 
stock  of  such  corporation,  joint  stock  company 
or  association,  or  insurance  company,  outstand- 
ing at  the  close  of  the  year,  and  in  the  case  of  a 


NET  INCOME;  DEDUCTIONS  125 

bank,  banking  association,  or  trust  company,  all 
interest  actually  paid  by  it  within  the  year  on 
deposits." 

The  provision  (fourth)  in  the  act  of  1909  is 
as  follows:  "all  sums  paid  by  it  within  the  year 
for  taxes  imposed  under  the  authority  of  the 
United  States  or  of  any  State  or  Territory 
thereof,  or  imposed  by  the  Government  of  any 
foreign  country  as  a  condition  to  carrying  on 
business  therein." 

In  the  act  of  1909  there  is  (fifth)  as  to  amounts 
received  as  dividends  upon  stock  of  other  cor- 
porations, etc.,  which  does  not  appear  in  the 
present  act.  The  writer  in  the  Wall  St.  Journ. 
hi  Art.  X  declares  that  there  is  a  deliberate 
purpose  to  introduce  punitive  legislation  into 
the  present  act.  "The  idea  seems  to  be,  indeed, 
is  frankly  avowed,  that  holding  companies  are 
bad  in  themselves  and  should  be  discouraged 
by  indirection.  At  the  same  time  they  make 
easy  subjects  for  taxation."  As  to  the  act  of 
1909,  see  28  Atty.  Gen.  Op.  140. 

The  remainder  of  this  sub-section  relative  to 
corporations,  etc.,  organized  under  the  laws  of 
a  foreign  country,  differs  somewhat  from  the 
provisions  of  the  act  of  1909,  and  is  in  many  re- 
spects similar  to  the  provisions  of  the  first  part 
of  this  sub-section  relative  to  corporations,  etc., 
organized  in  this  country. 


126  INCOME   TAX   LAW   EXPLAINED 

The  writer  in  the  Wall  St.  Journ.  in  Art.  XV 
says:  "Real  estate  corporations  also  benefit 
under  an  amendment,  dealing  with  the  subject 
of  a  tax  on  the  interest  on  indebtedness,  where 
such  indebtedness  exceeds  the  capital  em- 
ployed. In  the  House  bill,  as  pointed  out  in 
the  Wall  Street  Journal  of  June  23  and  24, 
no  deduction  from  gross  income  is  allowed  for 
interest  paid  on  debt  in  excess  of  capital,  thus 
forcing  the  payment  of  an  income  tax  on 
outgo.  It  is  now  provided  that  in  computing 
net  income  a  corporation  may  deduct  from 
gross  the  interest  not  exceeding  '  one-half  of 
the  sum  of  its  interest  bearing  indebtedness 
and  its  paid-up  capital  stock  outstanding. ' 

"Thus,  in  the  case  cited  in  Article  VII  of 
this  series,  where  a  corporation  has  bought  a 
loft  building  for  $100,000,  paying  its  entire 
capital  of  $20,000  for  its  equity  and  executing 
a  mortgage  for  $80,000,  it  would  be  required 
to  pay  an  income  tax  on  the  interest  it  pays 
out  on  only  $20,000  instead  of  on  $60,000, 
as  under  the  House  bill. 

"So,  also,  in  the  case  cited  in  Article  VI 
of  this  series,  where  the  Interborough  Rapid 
Transit  Co.,  with  capital  of  $35,000,000  and 
a  bonded  debt  of  $170,000,000,  would  have 
been  called  on  to  pay  an  income  tax  on  the 
interest  it  paid  out  on  $135,000,000  of  its  bonds, 


NET   INCOME;   DEDUCTIONS  127 

under  the  Senate  amendment,  this  income  tax 
on  debt  would  be  reduced  to  1%  on  the  in- 
terest it  paid  on  $50,000,000  instead  of  on 
$135,000,000." 

As  to  premium  dividends  of  a  life  insurance 
company  not  being  taxable  as  part  of  the  com- 
pany 's  "net  income,"  see  Mutual  Benefit 
Ins.  Co.  v.  Herold,  198  Fed.  Rep.  199;  201 
Id.  918.  As  to  a  dividend  in  case  of  a  full-paid 
participating  policy,  see  198  Fed.  Rep.  199. 
As  to  the  "net  income"  of  a  mining  company, 
see  Stratton's  Independence  v.  Howbert,  23 
Treas.  Decis.  (1796).  The  word  "income" 
was  held  to  mean  that  already  received,  and 
"net  income"  in  the  case  of  insurance  com- 
panies was  held  not  to  include  uncollected  and 
deferred  premiums  and  interests,  accrued  and 
due,  but  not  actually  received.  Mutual  Bene- 
fit Ins.  Co.  v.  Herold,  198  Fed.  Rep.  199. 

An  ordinary  expenditure  by  a  mutual  life 
insurance  company  for  renewal  of  office  furni- 
ture and  equipment  was  held  an  expense  of 
maintenance  and  operation,  which  it  was 
entitled  to  deduct.  Mutual  Benefit  Ins.  Co. 
v.  Herold,  198  Fed.  Rep.  199. 

That  the  amount  paid  by  a  corporation  as 
a  tax  could  not  be  deducted  as  an  expense 
of  business.  See  10  Int.  Rev.  Rec.  57.  But  that 
the  amount  paid  as  taxes  on  the  capital,  cir- 


128  INCOME   TAX   LAW  EXPLAINED 

culation,  and  deposits  during  the  period  covered 
by  the  return  might  be  deducted  like  other 
expenses.  See  5  Int.  Rev.  Rec.  74. 

That  the  amount  paid  as  premium  upon 
United  States  bonds  purchased  by  the  cor- 
poration was  not  deductible  as  a  loss  from 
gross  earnings,  as  it  was  a  part  of  the  invest- 
ment. See  5  Int.  Rev.  Rec.  74. 

That  to  get  at  the  amount  of  taxable  gains 
only  such  losses  as  had  been  ascertained  and 
settled  during  the  period  covered  by  the  re- 
turn should  be  deducted.  See  5  Int.  Rev.  Rec. 
74.  And  that  no  deduction  was  to  be  made 
on  account  of  a  part  of  the  earnings  being  the 
interest  upon  railroad  bonds  owned  by  the 
corporation,  and  upon  which  a  tax  had  been 
withheld,  or  on  account  of  tax  withheld  by 
other  corporations  from  dividends  payable  to 
it.  See  5  Int.  Rev.  Rec.  91. 

That  the  value  of  ore  cannot  be  charged 
off  as  depreciation,  see  Stratton  's  Independence 
v.  Howbert,  23  Treas.  Decis.  (1796) .  See  pp.  164 
et  seq.  The  contention  that  the  tax  was  on 
the  corpus  and  thus  unconstitutional  was  not 
sustained.  Same  case.  As  to  a  mutual  in- 
surance company  being  allowed  to  deduct  a 
certain  reserve  from  its  income,  see  Mutual 
Benefit  Ins.  Co.  v.  Herold,  198  Fed.  Rep.  199. 


COMPUTATION;   EETURNS;   ASSESSMENTS      129 

COMPUTATION      OP      TAX  —  RETURNS  — 

ASSESSMENTS   AND    NOTICE. 

(c)  The  tax  herein  imposed  shall  be 
computed  upon  its  entire  net  income  ac- 
crued within  each  preceding  calendar  year 
ending  December  thirty-first :  Provided  how- 
ever, that  for  the  year  ending  December 
thirty-first,  nineteen  hundred  and  thirteen, 
said  tax  shall  be  imposed  upon  its  entire 
net  income  accrued  within  that  portion 
of  said  year  from  March  first  to  December 
thirty-first,  both  dates  inclusive,  to  be 
ascertained  by  taking  five-sixths  of  its 
entire  net  income  for  said  calendar  year: 
Provided  further,  that  any  corporation, 
joint-stock  company  or  association,  or  in- 
surance company  subject  to  this  tax  may 
designate  the  last  day  of  any  month  in 
the  year  as  the  day  of  the  closing  of  its 
fiscal  year  and  shall  be  entitled  to  have 
the  tax  payable  by  it  computed  upon 
the  basis  of  the  net  income  ascertained 
as  herein  provided  for  the  year  ending  on 


130  INCOME   TAX   LAW   EXPLAINED 

the  day  so  designated  in  the  year  preceding 
the  date  of  assessment  instead  of  upon 
the  basis  of  the  net  income  for  the  calen- 
dar year  preceding  the  date  of  assessment; 
and  it  shall  give  notice  of  the  day  it  has 
thus  designated  as  the  closing  of  its  fiscal 
year  to  the  collector  of  the  district  in 
which  its  principal  business  office  is  lo- 
cated at  any  time  not  less  than  thirty 
days  prior  to  the  date  upon  which  its 
annual  return  shall  be  filed.  All  corpora- 
tions, joint-stock  companies  or  associations 
and  insurance  companies  subject  to  the 
tax  herein  imposed,  computing  taxes  upon 
the  income  of  the  calendar  year,  shall,  on 
or  before  the  first  day  of  March,  nine- 
teen hundred  and  fourteen,  and  the  first 
day  of  March  in  each  year  thereafter, 
and  all  corporations,  joint-stock  compa- 
nies or  associations,  and  insurance  com- 
panies, computing  taxes  upon  the  in- 
come of  a  fiscal  year  which  it  may  designate 
in  the  manner  hereinbefore  provided,  shall 
render  a  like  return  within  sixty  days  after 


COMPUTATION;  RETURNS;   ASSESSMENTS      131 

the  close  of  its  said  fiscal  year,  and  within 
sixty  days  after  the  close  of  its  fiscal 
year  in  each  year  thereafter,  or  in  the  case 
of  a  corporation,  joint-stock  company  or 
association,  or  insurance  company,  organ- 
ized or  existing  under  the  laws  of  a  foreign 
country,  in  the  place  where  its  principal 
business  is  located  within  the  United 
States,  in  such  form  as  the  Commissioner 
of  Internal  Revenue,  with  the  approval 
of  the  Secretary  of  the  Treasury,  shall  pre- 
scribe, shall  render  a  true  and  accurate 
return  under  oath  or  affirmation  of  its 
president,  vice-president,  or  other  prin- 
cipal officer,  and  its  treasurer  or  assistant 
treasurer,  to  the  collector  of  internal  rev- 
enue for  the  district  in  which  it  has  its 
principal  place  of  business,  setting  forth 
(first)  the  total  amount  of  its  paid-up 
capital  stock  outstanding,  or  if  no  capital 
stock,  its  capital  employed  in  business, 
at  the  close  of  the  year;  (second)  the  total 
amount  of  its  bonded  and  other  indebted- 
ness at  the  close  of  the  year;  (third)  the 


132  INCOME   TAX   LAW   EXPLAINED 

gross  amount  of  its  income,  received  dur- 
ing such  year  from  all  sources,  and  if 
organized  under  the  laws  of  a  foreign  coun- 
try the  gross  amount  of  its  income 
received  within  the  year  from  business 
transacted  and  capital  invested  within  the 
United  States;  (fourth)  the  total  amount 
of  all  its  ordinary  and  necessary  expenses 
paid  out  of  earnings  in  the  maintenance 
and  operation  of  the  business  and  prop- 
erties of  such  corporation,  joint-stock  com- 
pany or  association,  or  insurance  com- 
pany within  the  year,  stating  separately 
all  rentals  or  other  payments  required  to 
be  made  as  a  condition  to  the  continued 
use  or  possession  of  property,  and  if 
organized  under  the  laws  of  a  foreign  coun- 
try the 'amount  so  paid  in  the  mainte- 
nance and  operation  of  its  business  within 
the  United  States;  (fifth)  the  total  amount 
of  all  losses  actually  sustained  during  the 
year  and  not  compensated  by  insurance  or 
otherwise,  stating  separately  any  amounts 
allowed  for  depreciation  of  property,  and 


COMPUTATION;   RETURNS;  ASSESSMENTS      133 

in  case  of  insurance  companies  the  net  ad- 
dition, if  any,  required  by  law  to  be  made 
within  the  year  to  reserve  funds  and  the 
sums  other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts: 
Provided  further,  that  mutual  fire  insur- 
ance companies  requiring  their  members 
to  make  premium  deposits  to  provide 
for  losses  and  expenses  shall  not  return 
as  income  any  portion  of  the  premium 
deposits  returned  to  their  policy-holders, 
but  shall  return  as  taxable  income  all 
income  received  by  them  from  all  other 
sources  plus  such  portions  of  the  pre- 
mium deposits  as  are  retained  by  the 
companies  for  purposes  other  than  the 
payment  of  losses  and  expenses  and  re- 
insurance reserves:  Provided  further,  that 
mutual  marine  insurance  companies  shall 
include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by 
them  less  amounts  paid  for  re-insurance,  but 
shall  be  entitled  to  include  in  deductions 
from  gross  income  amounts  repaid  to  pol- 


134  INCOME   TAX    LAW   EXPLAINED 

icy-holders  on  account  of  premiums  pre- 
viously paid  by  them,  and  interest  paid 
upon  such  amounts  between  the  ascer- 
tainment thereof  and  the  payment  thereof 
and  life  insurance  companies  shall  not 
include  as  income  in  any  year  such  por- 
tion of  any  actual  premium  received  from 
any  individual  policy-holder  as  shall  have 
been  paid  back  or  credited  to  such  indi- 
vidual policy-holder,  or  treated  as  an  abate- 
ment of  premium  of  such  individual  policy- 
holder,  within  such  year;  and  in  case 
of  a  corporation,  joint-stock  company  or 
association,  or  insurance  company,  or- 
ganized under  the  laws  of  a  foreign  coun- 
try, all  losses  actually  sustained  by  it 
during  the  year  in  business  conducted 
by  it  within  the  United  States,  not  com- 
pensated by  insurance  or  otherwise,  stat- 
ing separately  any  amounts  allowed  for 
depreciation  of  property,  and  in  case  of 
insurance  companies  the  net  addition,  if 
any,  required  by  law  to  be  made  within 
the  year  to  reserve  funds  and  the  sums 


COMPUTATION;  RETURNS;  ASSESSMENTS      135 

other  than  dividends  paid  within  the 
year  on  policy  and  annuity  contracts: 
Provided  further,  that  mutual  fire  insur- 
ance companies  requiring  their  members 
to  make  premium  deposits  to  provide 
for  losses  and  expenses  shall  not  return 
as  income  any  portion  of  the  premium 
deposits  returned  to  their  policy-holders, 
but  shall  return  as  taxable  income  all  in- 
come received  by  them  from  all  other 
sources  plus  such  portions  of  the  pre- 
mium deposits  as  are  retained  by  the 
companies  for  purposes  other  than  the 
payment  of  losses  and  expenses  and  re- 
insurance reserves:  Provided  further,  that 
mutual  marine  insurance  companies  shall 
include  in  their  return  of  gross  income 
gross  premiums  collected  and  received  by 
them .  less  amounts  paid  for  reinsurance, 
but  shall  be  entitled  to  include  in  deduc- 
tions from  gross  income  amounts  repaid 
to  policy-holders  on  account  of  premiums 
previously  paid  by  them  and  interest 
paid  upon  such  amounts  between  the  as- 


136  INCOME   TAX   LAW   EXPLAINED 

certainment  thereof  and  the  payment  there- 
of and  life  insurance  companies  shall  not 
include  as  income  in  any  year  such  por- 
tion of  any  actual  premium  received  from 
any  individual  policy-holder  as  shall  have 
been  paid  back  or  credited  to  such  indi- 
vidual policy-holder,  or  treated  as  an  abate- 
ment of  premium  of  such  individual  policy- 
holder,  within  such  year;  (sixth)  the  amount 
of  interest  accrued  and  paid  within  the 
year  on  its  bonded  or  other  indebtedness 
not  exceeding  one-half  of  the  sum  of  its 
interest  bearing  indebtedness  and  its  paid- 
up  capital  stock,  outstanding  at  the  close 
of  the  year,  or  if  no  capital  stock,  the 
amount  of  interest  paid  within  the  year 
on  an  amount  of  indebtedness  not  exceed- 
ing the  amount  of  capital  employed  in 
the  business  at  the  close  of  the  year, 
and  in  the  case  of  a  bank,  banking  asso- 
ciation, or  trust  company,  stating  sepa- 
rately all  interest  paid  by  it  within  the 
year  on  deposits;  or  in  case  of  a  corporation, 
joint-stock  company  or  association,  or  in- 


COMPUTATION;  RETURNS;  ASSESSMENTS      137 

surance  company,  organized  under  the 
laws  of  a  foreign  country,  interest  so  paid 
on  its  bonded  or  other  indebtedness  to 
an  amount  of  such  bonded  or  other  in- 
debtedness not  exceeding  the  proportion 
of  its  paid-up  capital  stock  outstanding 
at  the  close  of  the  year,  or  if  no  capital 
stock,  the  amount  of  capital  employed 
in  the  business  at  the  close  of  the  year, 
which  the  gross  amount  of  its  income  for 
the  year  from  the  business  transacted  and 
capital  invested  within  the  United  States 
bears  to  the  gross  amount  of  its  income 
derived  from  all  sources  within  and  with- 
out the  United  States;  (seventh)  the  amount 
paid  by  it  within  the  year  for  taxes  imposed 
under  the  authority  of  the  United  States 
and  separately  the  amount  so  paid  by 
it  for  taxes  imposed  by  the  Government 
of  any  foreign  country;  (eighth)  the  net 
income  of  such  corporation,  joint-stock 
company  or  association,  or  insurance  com- 
pany, after  making  the  deductions  in 
this  subsection  authorized.  All  such  re- 


138  INCOME   TAX   LAW  EXPLAINED 

turns  shall  as  received  be  transmitted 
forthwith  by  the  collector  to  the  Commis- 
sioner of  Internal  Revenue. 

All  assessments  shall  be  made  and  the 
several  corporations,  joint-stock  companies 
or  associations,  and  insurance  companies 
shall  be  notified  of  the  amount  for  which 
they  are  respectively  liable  on  or  before 
the  first  day  of  June  of  each  successive 
year,  and  said  assessment  shall  be  paid 
on  or  before  the  thirtieth  day  of  June: 
Provided,  that  every  corporation,  joint- 
stock  company  or  association,  and  insur- 
ance company,  computing  taxes  upon  the 
income  of  the  fiscal  year  which  it  may 
designate  in  the  manner  hereinbefore  pro- 
vided, shall  pay  the  taxes  due  under  its 
assessment  within  one  hundred  and  twenty 
days  after  the  date  upon  which  it  is 
required  to  file  its  list  or  return  of  in- 
come for  assessment;  except  in  cases  of 
refusal  or  neglect  to  make  such  return, 
and  in  cases  of  false  or  fraudulent  returns, 
in  which  cases  the  Commissioner  of  In- 


COMPUTATION;   RETURNS;   ASSESSMENTS      139 

ternal  Revenue  shall,  upon  the  discovery 
thereof,  at  any  time  within  three  years 
after  said  return  is  due,  make  a  return  upon 
information  obtained  as  provided  for  in 
this  section  or  by  existing  law,  and  the 
assessment  made  by  the  Commissioner  of 
Internal  Revenue  thereon  shall  be  paid  by 
such  corporation,  joint-stock  company  or 
association,  or  insurance  company  imme- 
diately upon  notification  of  the  amount  of 
such  assessment;  and  to  any  sum  or  sums 
due  and  unpaid  after  the  thirtieth  day  of 
June  in  any  year,  or  after  one  hundred  and 
twenty  days  from  the  date  on  which  the 
return  of  income  is  required  to  be  made  by 
the  taxpayer,  and  after  ten  days'  notice  and 
demand  thereof  by  the  collector,  there  shall 
be  added  the  sum  of  five  per  centum  on  the 
amount  of  tax  unpaid  and  interest  at  the  rate 
of  one  per  centum  per  month  upon  said  tax 
from  the  time  the  same  becomes  due. 

The  act  of  1909  provides  that  there  shall  be 
deducted  from  the  amount  of  the  net  income 


140  INCOME   TAX   LAW   EXPLAINED 

the  sum  of  $5,000,  and  the  tax  shall  be  com- 
puted upon  the  remainder.  The  provisions 
in  the  present  act  through  the  words  "upon 
which  its  annual  return  shall  be  filed, "  are  new. 

In  the  present  act  the  provision  beginning 
with  the  words,  "All  corporations,  joint-stock 
companies  or  associations "  and  ending  with 
the  words  "setting  forth"  just  before  "  (first) " 
is  considerably  changed  from  the  provision  in 
the  act  of  1909. 

The  provision  beginning  with  "(first)"  in 
the  present  act  differs  from  that  in  the  act  of 
1909  in  that  the  words  "or  if  no  capital  stock 
its  capital  employed  in  business"  are  inserted. 

At  the  end  of  the  provision  beginning  with 
"(third)"  there  is  a  clause  in  the  act  of  1909 
as  to  dividends  upon  stock  of  other  corporations, 
which  does  not  appear  in  the  present  act. 

The  provision  beginning  with  "(fourth)" 
is  the  same  in  both  acts  save  that  the  words 
"all  charges  such  as  rentals  or  franchise 
payments"  in  the  act  of  1909  are  changed 
to  "all  rentals  or  other  payments,"  in  the 
present  act. 

The  first  part  of  the  provision  beginning 
with  "(fifth)"  is  the  same  in  both  acts,  save 
that  the  order  of  the  words  in  the  clause  begin- 
ning with  "in  case  of  insurance  companies" 
is  changed.  The  provisions  as  to  insurance 


COMPUTATION;  RETUKNS;  ASSESSMENTS    141 

companies    each    beginning    with    "  Provided 
further"  are  new  in  the  present  act. 

In  the  act  of  1909  ' '  sixth  "  is  as  follows.  ' '  The 
amount  of  interest  actually  paid  within  the 
year  on  its  bonded  or  other  indebtedness  to  an 
amount  of  such  bonded  and  other  indebtedness 
not  exceeding  the  paid-up  capital  stock  of 
such  corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company,  outstanding 
at  the  close  of  the  year,  and  hi  the  case  of  a 
bank,  banking  association,  or  trust  company, 
stating  separately  all  interest  paid  by  it  within 
the  year  on  deposits;  or  in  case  of  a  corporation, 
joint-stock  company  or  association,  or  insurance 
company,  organized  under  the  laws  of  a  foreign 
country,  interest  so  paid  on  its  bonded  or  other 
indebtedness  to  an  amount  of  such  bonded 
and  other  indebtedness  not  exceeding  the  pro- 
portion of  its  paid-up  capital  stock  outstanding 
at  the  close  of  the  year,  which  the  gross  amount 
of  its  income  for  the  year  from  business  tran- 
sacted and  capital  invested  within  the  United 
States  and  any  of  its  Territories,  Alaska,  and 
the  District  of  Columbia,  bears  to  the  gross 
amount  of  its  income  derived  from  all  sources 
within  and  without  the  United  States." 

As  to  " seventh,"  the  words  "as  a  condition 
to  carrying  on  business  therein"  in  the  act  of 
1909  do  not  appear  in  the  present  act. 


142  INCOME   TAX   LAW   EXPLAINED 

The  last  paragraph  of  this  sub-section  be- 
ginning with  the  words  "all  assessments  shall 
be  made"  and  ending  with  the  words  "from 
the  time  the  same  becomes  due"  is  identical 
with  the  last  part  of  paragraph  "Fifth"  of  the 
act  of  1909,  except  that  in  the  present  act  there 
is  inserted  the  clause  beginning  "Provided, 
that  every  corporation"  and  ending  with 
"income  for  assessment."  Also  towards  the 
end  of  the  paragraph  the  clause  "as  provided 
for  in  this  section  or  by  existing  law"  is  sub- 
stituted for  "as  above  provided  for." 

The  words  "or  after  one  hundred  and  twenty 
days  from  the  date  on  which  the  return  of 
income  is  required  to  be  made  by  the  tax- 
payer" are  inserted  in  the  present  act. 

INSTRUCTIONS  AS  TO  RETURNS. 

In  23  Treas.  Decis.  (1806)  it  is  stated  that 
"it  is  incumbent  upon  every  corporation,  not 
specifically  enumerated  as  exempt,  to  file  its 
return  within  the  prescribed  time  or,  in  lieu 
of  a  return,  to  file  a  statement  within  that  time 
showing  that  it  is  exempt  by  reason  of  the 
character  and  purpose  of  its  organization,  and 
whether  or  not  it  was  actually  carrying  on  or 
doing  business  for  profit  during  the  year  for 
which  the  return  is  required." 


INSTRUCTIONS  143 

Returns  filed  on  or  before  March  1,  which 
were  returned  for  amendment  and  again  re- 
ceived by  the  collector  after  March  1,  will 
be  marked  as  received  by  the  collector  on  the 
date  of  first  filing.  20  Treas.  Decis.  (1705). 

Increased  valuations  of  assets  entered  on 
books  of  corporations  to  be  included  in  gross 
income  in  then*  returns  of  annual  net  income. 
Such  increased  valuations  are  not  required 
to  be  entered  on  books.  20  Treas.  Decis. 
(1706). 

All  corporations  of  the  kinds  specified  in  the 
act  as  subject  to  the  tax  are  bound  to  file 
returns,  though  their  net  profits  are  not  suffi- 
cient to  render  them  liable  to  the  tax.  United 
States  v.  Military  Const.  Co.,  204  Fed.  Rep. 
153;  United  States  v.  Acorn  Roofing  Co.,  204 
Fed.  Rep.  157.  Every  corporation  subject 
to  the  tax  must  make  returns  whether  or  not  its 
net  income  is  large  enough  to  make  it  liable 
for  any  amount  of  the  tax.  For  a  mere  failure 
to  make  such  returns  in  time,  in  the  case  of 
corporations  with  incomes  so  limited  as  not 
to  be  liable  to  the  payment  of  any  tax,  liberal 
compromise  is  a  course  required  by  the  spirit 
and  policy  of  the  laws  of  the  United  States. 
29  Atty.  Gen.  Op.  219. 

Under  a  State  corporation  law  it  was  held 
that  the  officers  of  a  corporation,  which  had 


144  INCOME   TAX   LAW   EXPLAINED 

dissolved,  were  to  make  the  return.  United 
States  v.  General  Inspection  Co.,  192  Fed. 
Rep.  223. 

As  to  when  so-called  mutual  building  and 
loan  associations  should  make  the  required 
return,  see  19  Treas.  Decis.  (1655). 

Where  returns  are  filed  within  the  time 
required  and  returned  for  correction,  and  cor- 
rect returns  subsequently  filed,  names  should 
be  stricken  from  delinquent  list.  21  Treas. 
Decis.  (1711). 

Instructions  as  to  regular  lists  and  all 
corporation-tax  lists  are  given  in  19  Treas. 
Decis.  (1639).  As  to  not  granting  extension  of 
time  where  the  application  was  not  made 
on  or  before  a  certain  date,  see  20  Treas. 
Decis.  (1702). 

Suggestions  as  to  returns  by  manufacturing 
and  mercantile  corporations  are  given  in 
19  Treas.  Decis.  (1588). 

Inspection  of  returns  of  corporations,  execu- 
tive order,  and  regulations  will  be  found  in  19 
Treas.  Decis.  (1665). 

It  was  held  in  United  States  v.  General 
Inspection  Co.,  204  Fed.  Rep.  657,  that  the 
notice  of  the  assessment  required  to  be  given 
to  the  corporation  by  subdivision  5  of  the  act 
of  1909  might  lawfully  be  given  by  mail, 
and  a  notice  so  sent  by  the  collector  in  a 


CORPORATIONS,  ETC.,  SUBJECT  TO  TAX      145 

franked  envelope  bearing  a  return  card,  ad- 
dressed to  the  corporation  at  the  place  of  its 
principal  office,  and  not  returned,  was  pre- 
sumptively received,  and  the  burden  rested  on 
the  corporation  to  prove  to  the  contrary,  to 
avoid  the  penalty. 

The  following  synopsis  of  decisions  made 
from  time  to  time  was  published  for  the 
information  of  internal  revenue  officers  and 
others  concerned  by  the  Commissioner  on  Dec. 
15,  1911,  and  will  be  found  in  21  Treas.  Decis. 
(1742).  As  previously  stated,  some  of  these 
decisions  are  not  applicable  to  the  present  law. 

CLASS  OF  CORPORATIONS,   ETC.,  SUBJECT 
TO  TAX. 

1.  The  tax  imposed  by  the  act  applies  to 
all  corporations,  joint  stock  companies,   and 
associations,    and    every    insurance    company 
except    those   specifically   exempted,    without 
reference  to  the  kind  of  business  carried  on. 

2.  Every  corporation,  etc.,  not  specifically 
enumerated  as  exempt  shall  make  the  return 
required  by  law,  although  its  net  income  dur- 
ing  the   year   may   not   have   exceeded    the 
statutory  amount.   28  Atty.  Gen.,  Op.  140.  See 
United  States  v.  Acorn  Roofing  Co.,  23  Treas. 
Decis.  (1784). 


146  INCOME   TAX   LAW  EXPLAINED 

.  3.  Corporations  claiming  special  exemption 
should  nevertheless  make  return  (in  blank,  if 
desired)  accompanied  by  a  statement  setting 
forth  the  ground  on  which  exemption  is  claimed. 
Failure  to  receive  blanks  upon  which  to  make 
return  is  no  excuse  for  delinquency  in  making 
return,  as  there  is  no  duty  imposed  upon  the 
Government  to  furnish  corporations  with  such 
blanks. 

4.  Charitable  institutions  supported  by  vol- 
untary contributions  or  State  appropriations 
are  held  to  be  exempt  from  the  payment  of  the 
special  excise  tax  on  corporations,  but  should 
file  a  return  in  blank  as  provided  in  paragraph 
3  thereof. 

5.  Corporations,  etc.,  organized  during  the 
year  or  going  into  liquidation  during  the  year 
should  nevertheless  render  a  sworn  return  on 
the  prescribed  form.      The  tax  imposed,  how- 
ever, does  not   apply  to  corporations  which 
went  out  of  existence  prior  to  the  passage  of 
the  act  (Aug.  5,  1909). 

6.  Where  company  has  dissolved  and  the 
required  return  is  not  made  by  its  officers,  such 
return    will    be    prepared    by    commissioner. 
(T.  D.  1736.) 

7.  Where  corporation  has  gone  into  bank- 
ruptcy, returns  in  such  cases  to  be  made  by 
trustee  in  bankruptcy. 


CORPORATIONS,  ETC.,  SUBJECT  TO  TAX      147 

8.  Railroad  companies  operating  leased  or 
purchased  lines  to  include  all  receipts  derived 
therefrom,    and   if   bonded   indebtedness   has 
been   assumed   may   deduct   interest   thereon 
to  an  amount  not  exceeding  its  own  paid-up 
capital  stock.     If  such  subsidiary  companies 
receive  income  in  the  way  of  rentals,   etc., 
return  to  be  also  made  by  such  companies. 

9.  Corporations,  etc.,  organized  under  the 
authority  of  the  United  States,  or  any  State 
or  Territory  thereof,  or  Alaska,  or  the  District 
of  Columbia,  to  include  in  their  returns  not 
only  the  income  derived  from  the  business 
carried  on  within  the  confines  of  the  United 
States,    but    income    received    from    business 
transacted  hi  any  foreign  country  as  well. 

10.  Corporations    having    branch    or    sub- 
sidiary companies  to  include  in  then*  returns 
the  income  of  all  such  companies  when  no 
distinction  is  made  in  operating  and  account- 
ing by  reason  of  the  separate  incorporation 
of  such  subsidiary  companies;  otherwise  a  re- 
turn by  each  corporation  should  be  made. 

11.  Foreign     companies     having     several 
branch  offices  in  the  United  States  should  each 
designate  one  of  such  branches  as  its  prin- 
cipal   office    and    should    also    designate    the 
proper  officers  to  make  the  required  return. 

12.  Where  a  consolidation  of  two  or  more 


148  INCOME   TAX   LAW   EXPLAINED 

corporations  has  been  effected  during  the  year, 
and  each  or  any  such  corporation  subsequent 
to  such  consolidation  collects  prior  existing 
debts,  each  such  corporation  should  make 
separate  return  and  include  therein  all  such  col- 
lected debts,  as  also  all  income  received  during 
the  year  prior  to  the  date  of  consolidation. 

13.  " Principal  place  of  business"   is  held 
to  mean  the  principal  office  where  the  com- 
pany keeps  its  books  from  which  the  required 
return  is  to  be  prepared  and  not  necessarily  the 
place  where  the  operating  plant  is  located. 

14.  As  the  law  specifically  provides  that  the 
tax  imposed  shall  be  computed  on  the  net 
income  during  each  calendar  year,  returns  of 
income  based  on  any  period  other  than  the 
calendar  year  cannot  be  accepted. 

15.  Full  amount  of  stock,   as  represented 
by  the  par  value  of  the  shares  issued,  to  be  re- 
garded as  the  paid-up  capital  stock,  except 
when  such  stock  is  assessable  on  account  of 
deferred  payments,  in  which  case  the  amount 
actually  paid  on  such  shares  will  constitute  the 
actual  paid-up  capital  stock  of  the  corporation. 

16.  Capital  stock  held  to  include  both  pre- 
ferred and  common  stock. 

17.  Surplus  and  undivided  profits  not  to  be 
included  in  capital  stock. 

18.  Holding  companies  known  as  "voting 


CORPORATIONS,  ETC.,  SUBJECT  TO  TAX   149 

trusts,"  receiving  only  dividends  on  stock  held, 
and  having  no  capital  stock,  etc.,  not  liable. 
But  see  now  pp.  8,  125. 

19.  Mutual  savings  banks  having  no  capital 
stock  not  liable  to  tax  imposed.    (28  Atty.  Gen. 
Op.  189.) 

20.  Cooperative   dairies   not   issuing   stock 
and  allowing  patrons  dividends  based  on  butter 
fat  in  milk  furnished  not  liable. 

21.  Foreign   steamship    companies    having 
no  office  in  the  United  States,  whose  vessels 
only   occasionally    touch    at    ports    hi    the 
United   States,   not  regarded  as  doing  busi- 
ness in  this  country  within  the  meaning  of 
the  statute. 

In  an  opinion  of  the  Attorney  General 
it  was  held  that  the  act  includes  "  foreign 
steamship  companies  having  agencies  in  this 
country  and  engaged  in  the  business  of  trans- 
porting passengers,  freight  or  mail;  that  as  the 
tax  so  imposed  is  not  upon  the  property  of  the 
corporation  or  the  income  derived  therefrom, 
but  is  a  special  excise  tax  with  respect  to  the 
carrying  on  or  doing  business,  such  tax,  as 
applied  to  the  business  so  carried  on  by  such 
foreign  steamship  companies,  is  not  upon  ex- 
ports or  upon  the  income  derived  from  the 
transportation  of  such  exports."  19  Treas. 
Decis.  (1600). 


150  INCOME   TAX   LAW   EXPLAINED 

22.  Companies    organized    in    Porto    Rico 
and  not  engaged  in  business  in  the  United 
States  not  subject  to  tax.    See  p.  200. 

23.  Corporations  owning  sugar  or  other  plan- 
tations and  disposing  of  the  products  thereof 
not  entitled  to  exemption  as  agricultural  organ- 
izations. 

24.  Corporations  organized  to  sell  provisions, 
etc.,  to  stockholders  and  others  not  exempted. 

25.  Corporations  organized  for  the  purpose 
of  holding  real  estate  to  make  return  of  income 
derived  from  the  property  so  held. 

26.  Corporations  going  into  liquidation  dur- 
ing any  tax  period,  may,  at  the  time  of  such 
liquidation,  prepare  a  " final  return"  covering 
the  business  done  during  the  fractional  part 
of  the  year  during  which  they  were  engaged 
in  business,   and   immediately   file   the  same 
with  the  collector  of  the  district  in  which  the 
corporation  has  its  principal  place  of  business. 

27.  Corporations  organized  for  the  purpose 
of  insuring  against  death,  or  injury  by  accident, 
or  against  damage  to  property  by  hail,  storm, 
or  lightning,  however  maintained,  are  held  to 
be  insurance  companies,  and  unless  they  may 
be  properly  classed  as  "  fraternal  beneficiary 
organizations  operating  under  the  lodge  sys- 
tem," must  make  returns  of  annual  net  in- 
come.   (T.  D.  1738.) 


CORPORATIONS,  ETC.,  SUBJECT  TO  TAX   151 

28.  Corporations    engaged    in    agricultural 
or  horticultural  pursuits  for  profit  are  liable 
under  the  law  to  make  returns  and  to  pay 
the  special  excise  tax  thereby  shown  to  be  due. 
Agricultural  and  horticultural  associations  spe- 
cifically enumerated  as  exempt   are   held   to 
be  such  associations  as  county  fairs  or  like 
organizations,  not  themselves  engaged  in  such 
pursuits,  but  which,  by  means  of  awards,  etc., 
are  intended  to  encourage  better  production, 
and  no  part  of  whose  net  income  inures  to  the 
benefit  of  any  private  stockholder  or  individual. 
(T.  D.  1737.) 

29.  Fruit  growers'  associations  whose  pur- 
pose is  to  promote  the  mutual  benefit  of  their 
members  in  growing,  harvesting,  and  market- 
ing their  products,  and  which  are  not  organized 
for  profit  and  have  no  capital  stock  represented 
by  shares,  and  whose  income  is  derived  wholly 
from  membership  fees,  dues,  and  assessments 
to  meet  necessary  expenses,  are  not  liable. 

30.  Corporations  engaged  in  growing  fruits, 
vegetables,  and  like  products  for  profit,  and 
distributing  such  profits  among  their  members 
on  the  basis  of  the  capital  invested,  are  liable 
and  must  make  returns  and  pay  taxes,  if  any 
are  found  to  be  due.     (T.  D.  1737.) 

31.  Associations  or  trusts  voluntarily  formed 
by  parties  at  interest  and  not  organized  "  under 


152  INCOME   TAX   LAW  EXPLAINED 

the  laws  of  the  United  States  or  of  any  State 
or  Territory  thereof,  or  of  the  laws  applicable 
to  the  District  of  Columbia  or  Alaska," 
are  not  corporations  within  the  meaning  or 
intent  of  the  law,  and  are  not  liable.  (See 
Eliot  v.  Freeman,  220  U.  S.  178.) 

32.  National  banks  do  not  come  within  any 
of  the  exemptions  named  in  the  act. 

33.  " Agricultural   organizations"   held   not 
to  come  within  the  statutory  exemption,  unless 
their  chief  object  is  the  promotion  or  advance- 
ment of  agricultural  interest,  and  no  part  of 
the  net  income  inures  to  the  benefit  of  their 
stockholders. 

34.  Mutual   Hail   Association   regarded   as 
an  insurance  company  and  not  as  an  agricul- 
tural association,  and  therefore  liable  to  tax. 

35.  Exemption  in  favor  of  fraternal  bene- 
ficiary associations  does  not  apply  to  mutual 
fire  insurance  companies. 

36.  Limited   partnership,    if   organized   for 
profit  and  having  a  capital  stock  represented 
by  shares,  although  no  " certificates  of  stock" 
are  issued,  is  liable  to  the  tax  imposed.    (28 
Atty.  Gen.  Op.  189.) 

37.  Interest  received  on  Government  bonds 
to  be  included  in  gross  income.    (28  Atty.  Gen. 
Op.  138.) 

38.  Returns  should  be  signed  and  verified 


INVENTORIES,   ACCOUNTS,    ETC.  153 

by  two  of  the  officers  designated  in  the  law. 
Signing  of  one  person  holding  two  such  offices 
not  permitted.  Agents  for  foreign  steamship 
companies  may  sign  the  required  returns,  if 
so  authorized  by  their  companies. 

39.  Returns  not  required  to  have  corporate 
seal  affixed. 

40.  Returns  filed  with  deputy  collector  re- 
garded as  having  been  filed  with  collector. 

41.  No   form  of  protest   prescribed.     Any 
form  of  protest  sufficient  if  filed  before  payment 
of  tax.   Hight  of  protest  not  to  be  denied. 

INVENTORIES,  ACCOUNTS,  ETC. 

42.  Where  an  inventory  or  its  equivalent 
was  not  taken  at  the  close  of  the  year  1908, 
a  supplemental  statement   showing  such   in- 
ventory   approximately    must    be    submitted 
with  the  return  on  the  regular  form.     Such 
supplemental  statement  shall  be  verified  under 
oath  by  the  treasurer  or  principal  financial 
officer  submitting  the  same.     (T.  D.  1578.) 

43.  Profits  realized  on  sale  of  real  estate 
during    the  year,   also    increase   in   value   of 
unsold  property,  if  taken  up  on  the  books  of 
the  corporation,  to  be  included  in  income. 

44.  Cost  of  manufactured  articles,  or  articles 
in  process   of  manufacture,   held   to   include 


154  INCOME   TAX  LAW  EXPLAINED 

original  cost  of  materials  used,  plus  cost  of 
labor,   etc. 

45.  Mortgaged  real  estate  should  be  inven- 
toried at  its  full  value  and  amount  of  mortgage 
reported  as  indebtedness. 

46.  Receipts  from  sale  of  patent  rights  to 
be  included  in  income. 

47.  No  particular  system  of    bookkeeping 
or   accounting   will   be   required   by   the   de- 
partment.    However,  the  business  transacted 
by  corporations,  etc.,  must  be  so  recorded  that 
each  and  every  item  therein  set  forth  may  be 
readily   verified   by   an   examination    of    the 
books  and  accounts  where  such  examination 
is  deemed  necessary. 

48.  Any  increase  in  the  value  of  the  capital 
assets,  as  determined  by  a  physical  revaluation 
and  taken  cognizance  of  by  the  corporation 
in  book  entries,  is  gain  and  must  be  accounted 
for  as  income  for   the   year   in   which   such 
increase  is  so  recognized  and  recorded. 

DEDUCTIONS,   EXPENSES,  ETC. 

49.  It  is  immaterial  whether  the  deductions 
are    evidenced    by    actual    disbursements    in 
cash  or  whether  evidenced  in  such  other  way 
as  to  be  properly  acknowledged  by  the  cor- 
porate officers  and  so  entered  on  the  books  as 


DEDUCTIONS,  EXPENSES,  ETC.  155 

to  constitute  a  liability  against  the  assets  of 
the  corporation,  etc.,  making  the  return. 

50.  Mortgage  indebtedness  on  real  estate, 
if  assumed  by  the  corporation  acquiring  such 
real  estate,  to  be  included  in  the  indebtedness 
of  the  corporation.    But  if  not  so  assumed  and 
remains  only  as  a  lien  on  the  property,  interest 
paid  thereon  may  be  deducted  as  a  charge 
"made  as  a  condition  to  the  continued  use  or 
possession  of  the  property."     (See  28  Atty. 
Gen.  Op.  198;  25  Treas.  Decis.  (1865);  19  Treas. 
Decis.  (1595);  Wall  St.  Journ.  Art.  VII.) 

51.  Cost  of  erecting  building,  if  included  in 
lease  under  which  property  is  held  by  com- 
pany, is  a  proper  deduction,  to  be  prorated 
according  to  time  fixed  by  lease. 

52.  General   expenses,    such   as   coal,    ship 
stores,  etc.,   of  foreign  steamship  companies, 
to  be  prorated  as  provided  in  act  for  interest 
deductions. 

53.  Amount  received  by  nursery  companies 
from  sales  of  trees,  etc.,  less  amount  expended 
for  seedlings  and  young  trees,  to  be  included 
in  gross  income.    Amount  expended  for  labor, 
salesmen,  etc.,  to  be  deducted  as  expenses. 

54.  Commissions    allowed    salesmen,    paid 
in  stock,  may  be  deducted  as  expense  if  so 
charged  on  books. 

55.  Sales  of  stock  and  bonds  are  regarded 


156  INCOME   TAX   LAW   EXPLAINED 

as  sales  of  capital  assets  and  should  be  so 
accounted  for.  (Art.  2,  regs.  31.)  But  pro- 
ceeds derived  from  sale  of  bonds  used  in  de- 
fraying ordinary  and  necessary  expenses  are  a 
proper  deduction  in  determining  the  company 's 
net  income. 

56.  Stock  issued  in  payment  of  property 
purchased  represents  capital  investments,  and 
notes  issued  during  the  year  represent  indebted- 
ness.   Corporate  funds  applied  to  the  payment 
of  outstanding  notes  not  a  proper  deduction 
in  ascertaining  net  income. 

57.  Amounts    expended    in    additions    and 
betterments  which  constitute  an  increase  in 
capital  investment  not  a  proper  deduction. 

58.  Dividends  received  by  corporations  on 
stock  of  other  corporations  whose  net  income 
does  not  exceed  $5,000  is  nevertheless  a  proper 
deduction   under   the   law.      (28   Atty.    Gen. 
Op.  140.)    But  see  pp.  8,  125. 

59.  Dividends  received  on  stock  of  foreign 
corporations  not  subject  to  tax  not  a  proper 
deduction. 

60.  Dividends   paid   employees   in   lieu   of 
wages  not  proper  deduction  as  expenses. 

61.  Royalties  on  patent  rights  to  be  reported 
as    income.      Allowance    for    depreciation    of 
patents   expiring   during   the   year,    however, 
will  be  allowed. 


DEDUCTIONS,  EXPENSES,  ETC.      157 

62.  In  the  case  of  lands  bought  prior  to 
January  1,  1909,  and  sold  during  any  subse- 
quent year,  the  profits  arising  from  such  sale, 
if  no  accounting  of  increased  value  of  land 
was  made  in  returns  for  previous  years,  should 
be  prorated  in  accordance  with  the  number 
of  years  the  land  was  held  by  the  corporation 
and  the  number  of  years  the  law  was  in  effect. 

63.  Banks    paying    taxes    assessed    against 
their  stockholders  because  of  their  ownership 
of  the  shares  of  stock  issued  by  such  banks 
can  not  deduct  the  amount  of  tax  so  paid 
in  making  their  return  for  the  special  excise 
tax  on  corporations.     (See  22  Treas.   Decis. 
1763  and  1771.) 

64.  Amounts  paid  for  pensions  to  retired 
employees,  or  to  their  families  or  others  de- 
pendent upon  them,  or  on  account  of  injuries 
received  by  employees,  are  proper  deductions 
as  "ordinary  and  necessary  expenses":  gifts 
or  gratuities  to  employees  in  the  service  of  a 
corporation  are  not  properly  deductible  in  as- 
certaining net  income.     Donations  made  for 
purposes  connected  with  the  operation  of  the 
property    when    limited    to    charitable    insti- 
tutions, hospitals,  or  educational  institutions, 
conducted  for  the  benefit   of  its  employees, 
or   their   dependents,    shall   be   proper   as   a 
deduction  under  the  same  head. 


158  INCOME   TAX   LAW   EXPLAINED 

65.  Where  allowances  on  account  of  salaries 
are  deemed  excessive  and  for  the  purpose  of 
evading  the  tax  due,  investigation  will  be  made, 
and  if  the  facts  warrant  prosecution  will  follow. 

66.  Interest  paid  on  time  deposits  and  de- 
posits subject  to  check  constitutes  a  proper 
deduction  from  the  amount  of  gross  income 
during  the  year. 

67.  Interest  on  portions  of  bonded  or  other 
indebtedness  bearing  different  rates  of  interest 
may  be  deducted  from  gross  income  during 
the  year,  provided  the  aggregate  amount  of 
such  indebtedness  does  not  exceed  the  paid-up 
capital  stock  of  the  corporation. 

68.  Interest  paid  during  the  year  on  notes 
given  prior  to  January  1,  1909,  to  be  prorated. 
But  interest  on  notes  given  in  1909,  and  pay- 
able  subsequent   to   December,    1909,   unless 
charged  on  the  company's  books,  is  not  a  proper 
deduction  from  the  income  of  that  year. 

69.  Interest,  taxes,  or  other  items  allowable 
as  deductions,  accruing  prior  to  January  1, 
1909,  are  not  allowable  deductions  from  the 
gross  income  of  years  subsequent  thereto. 

70.  Unearned  premiums  set  aside  by  insur- 
ance companies  as  reserve  not  to  be  included 
as  income  until  earned,  unless  the  same  shall 
be  entered  on  the  ledger  as  income  during 
the  year  in  which  received. 


DEDUCTIONS,  EXPENSES,  ETC.  159 

71.  Funds  set  aside  by  company  for  insuring 
their  own  property  not  a  proper  deduction. 

72.  As  the  tax  imposed  is  measured  by  and 
is  not  a  tax  upon  the  net  receipts  of  corpo- 
rations, etc.,  interest  received  during  the  year 
on  government  bonds  is  not  a  proper  deduc- 
tion  from   such   income   in   determining   the 
amount  of  tax  due.    (28  Atty.  Gen.  Op.  138.) 

73.  State,  county,  or  municipal  taxes  paid 
during  the  year  a  proper  deduction  in  ascer- 
taining the  net  income  of  corporations. 

74.  Import   duties   or  taxes  if  included  in 
arriving  at  cost  of  goods  are  not  deductible 
under  the  head  of  taxes  paid  during  the  year. 

75.  Bad  debts,  if  so  charged  off  the  com- 
pany 's    books   during   the    year,    are   proper 
deductions.     But  such  debts,  if  subsequently 
collected,  must  be  treated  as  income. 

76.  The  net  addition  to  reserves  of  insurance 
companies,  required  by  law,  may  be  based  on 
the  highest   amount   of  reserve   required  by 
any  State  in  which  the  insurance  company  does 
business.     (T.  D.  1727.) 

77.  Reserves  for  taxes  can  not  be  allowed, 
as    the    law    specifically   provides    that    only 
such  sums  as  are  paid  within  the  year  for 
taxes  can  be  deducted.    (T.  D.  1727.) 

78.  Where  a  corporation  or  insurance  com- 
pany holds  bonds  which  were  purchased  at  a 


160  INCOME   TAX   LAW   EXPLAINED 

rate  above  par,  and  a  proportionate  deduction 
of  the  value  of  such  bonds  is  made  on  its  books 
each  year  so  that  the  book  value  shall  be  the 
redemption  value  of  the  bonds  when  they 
become  due  and  payable,  the  return  of  annual 
net  income  may  show  the  depreciation  on 
account  of  amortization  of  such  bonds.  (T.  D. 
1727.) 

79.  Dividends  declared  by  insurance  com- 
panies are  not  deductible  from  gross  income 
under  the  guise  of  rebates  or  otherwise,  and 
such  dividends  when  applied  to  the  payment  of 
renewal  premiums,  or  to  shorten  the  endowment 
or  premium-paying  period,  or  applied  to  pur- 
chase paid-up  additions  and  annuities,  must 
be  considered  and  accounted  for  as  income. 

80.  Railroad   or   other   corporations   which 
have  leased  their  properties  in  consideration 
of  a  rental  equivalent  to  a  certain  rate  of  inter- 
est on  its  outstanding  capital  stock  and  the 
interest  on  the  bonded  indebtedness,  and  such 
rental  is  paid  by  the  lessee  directly  to  the 
stock  and  bond  holders,  should,  nevertheless, 
make  a  return  of  annual  net  income  showing 
the  rental  so  paid  as  having  been  received  by 
the  corporation.    (See  p.  108.) 

81.  Salaries  paid  to  an  officer  who  is  a  stock- 
holder, to  constitute  an  allowable  deduction, 
must  be  a  reasonable  and  fair  compensation 


DEPKECIATION  161 

for  the  services  rendered,  regardless  of  the 
amount  of  stock  which  such  officer  may  hold, 
and  must  have  been  authorized  by  the  board 
of  directors  and  made  a  matter  of  record  on 
the  minute  books  of  the  corporation. 

82.  "Good  will"  represents  the  value  at- 
tached to  a  business  over  and  above  the  value 
of  the  physical  property,  and  is  such  an  entirely 
intangible  asset  that  no  clain  for  depreciation 
in  connection  therewith  can  be  allowed. 

DEPRECIATION. 

83.  Depreciation  to  be  an  allowable  deduc- 
tion in  the  return  of  annual  net  income  of  a 
corporation  must  be  charged  off  on  the  ledger 
of  the  corporation,  so  as  to  show  a  reduction  in 
the  capital  assets  of  the  corporation  to  the 
extent  of  the  depreciation  claimed. 

84.  Deduction  on  account  of  depreciation 
of   property   must   be   based   on   lifetime   of 
property,  its  cost,  value,  and  use,  and  must  be 
evidenced  by  a  ledger  entry  and  a  like  reduction 
in  the  plant  and  property  account  with  respect 
to  which  depreciation  is  claimed. 

85.  In    the    case    of    corporations    owning 
stocks  and  bonds  or  other  securities,  if  an  an- 
nual adjustment  of  the  value  of  such  securi- 
ties is  made  and  the  adjusted  values  made  a 


162  INCOME   TAX   LAW   EXPLAINED 

matter  of  ledger  entry,  the  appreciation  of 
such  securities  as  so  entered  must  be  accounted 
for  as  income,  and  the  depreciation  may  be 
deducted  from  gross  income.  If  no  annual 
adjustment  is  made,  and  the  securities  are 
carried  from  year  to  year  as  a  permanent  in- 
vestment, there  will  be  neither  gain  nor  loss, 
as  to  the  principal  of  such  securities,  until  the 
same  shall  have  been  disposed  of,  when  the 
gain  or  loss  as  compared  with  the  original 
cost  shall  be  prorated,  and  the  amount  of  such 
gain  or  loss  apportioned  to  the  years  since  the 
incidence  of  the  tax,  to  wit,  January  1,  1909, 
shall  be  added  to  or  deducted  from  the  gross 
income  of  the  year  in  which  the  securities  were 
disposed  of.  But  see  pp.  8,  125. 

86.  Where  increase  or  decrease  during  the 
year  in  the  value  of  real  estate  acquired  in 
previous  years,  sold  or  held  for  sale,  is  taken 
up  on  the  books  and  the  rate  can  not  be  accu- 
rately determined  with  respect  to  individual 
years,  such  increase  or  decrease  may  be  pro- 
rated as  provided  by  regulations  in  cases  of 
sale  of  capital  assets. 

87.  Premiums  on  stocks   and  bonds  arbi- 
trarily charged  off  on  the  books  of  a  corpora- 
tion do  not  constitute  a  proper  deduction  on 
account    of    depreciation,    unless    there    shall 
have  been  an  actual  shrinkage  in  value  of  such 


DEPRECIATION  163 

stocks  and  bonds  to  the  extent  of  the  deduction 
claimed  during  the  year  for  which  the  return 
is  made. 

88.  Net  income  on  uncompleted  contracts 
may  be  estimated  on  the  basis  of  the  percent- 
age of  the  work  completed  as  compared  with 
the  contract  price  of  the  whole  work. 

89.  Cost  of  drilling  new  wells  by  oil  corpora- 
tions is  considered  betterments  and  additions 
to  the  capital  assets  of  the  corporation.    The 
expense  of  drilling  dry  wells  may,  however,  be 
charged  to  profit  and  loss. 

90.  Discounts,   other  than  bank  discounts 
on  notes  executed  by  a  corporation,  should  be 
segregated  from  the  interest  item  on  the  return, 
and  should  be  included  under  expenses,  item  4. 

91.  The  mere  removal  of  timber  by  cutting 
from  timber  lands,  unless  the  timber  is  other- 
wise disposed  of  through  sales  or  plant  opera- 
tions, is  considered  simply  a  change  in  form  of 
assets.    If  said  timber  is  disposed  of  through 
sales  or  otherwise  it  is  to  be  accounted  for  in 
accordance  with  regulations  governing  disposi- 
tion of  capital  and  other  assets. 

92.  Deduction  on  account  of  depreciation 
of  property  must  be  based  on  lifetime  of  prop- 
erty, its  cost,  value,  and  use.     (See  84  above.) 

93.  Loss  due  to  voluntary  removal  of  build- 
ings, etc.,  incident  to  improvements  is  either 


164  INCOME   TAX   LAW   EXPLAINED 

a  proper  charge  to  the  cost  of  the  new  addi- 
tions or  to  depreciation  already  provided,  as 
the  facts  may  indicate,  but  in  no  case  is  it  a 
proper  deduction  in  determining  net  income, 
except  as  it  may  be  reflected  in  the  reason- 
able amount  allowable  as  a  deduction  for 
depreciation. 

94.  Depreciation  of  company's  stock  a  loss 
to  the  stockholders,  but  not  a  loss  to  the  com- 
pany issuing  the  same,  and  therefore  not  a 
proper  deduction. 

PUBLICITY. 

95.  A  person  who  as  trustee  or  in  any  other 
fiduciary  relation  has  the  ownership  or  posses- 
sory right  to  stock  in  a  corporation  is  a  stock- 
holder in  such  corporation  within  the  equity 
of  the  rule  set  down  in  Treasury  Decision  No. 
1665,  governing  the  publicity  of  returns.    See 
p.  174. 

DEPRECIATION   IN  MINERALS,  OILS,   ETC. 

96.  In  case  of  corporations  whose  business 
consists  in  part  or  wholly  of  mining,  producing, 
and  disposing  of  deposits  of  nature  (ores,  coals, 
gas,  petroleum,  and  sundry  minerals),  the  con- 
duct of  such  business  will  be  understood  to 


DEPRECIATION   IN   MINERALS,  ETC.         165 

comprehend    two   classes   of  gains   or   losses, 
viz.: 

(a)  The  gain  or  loss  resulting  from  the  sale 
of  capital  assets,  i.  e.,  either  the  increment,  or 
the   loss,   arising   through   possessing   over   a 
period  of  time  the  investment  in  the  same. 

(b)  The  trading  or  commercial  gain  attached 
to  the  conduct  of  the  industry,  the  employ- 
ment of  working  capital,  the  effort  and  risk 
involved. 

97.  In  the  ascertainment  of  net  income  de- 
duction will  be  allowed  for  depreciation  aris- 
ing from  exhaustion  of  deposits  of  ore,  mineral, 
etc.,    and   for   depreciation   and   obsolescence 
of  improvements,  in  accordance  with  general 
regulations  respecting  depreciation  allowances, 
on  the  basis  of  the  original  capital  investment 
cost  of  the  properties  concerned  to  the  company 
reporting. 

98.  A  further  deduction  will  also  be  allowed, 
through  not  including  the  same  at  all  in  the 
item  of  gross  income  (Item  3,  Form  637),  for 
the  unearned  increment  represented  in  such 
properties  as  at  January  1,  1909,  which  will 
be  determined  in  general  as  follows: 

99.  An    estimate    should    be    made    as    of 
January  1,  1909,  of  the  fair  market  value  at 
that  date  of  the  minerals,   etc.,   in  deposit. 
This  estimate  should  be  formed  on  the  basis 


166  INCOME   TAX   LAW   EXPLAINED 

of  the  disposal  value  of  the  minerals  in  total 
and  exclusive  of  value  of  improvements  and 
development  work.  This  valuation  should 
also  be  reduced  to  a  unit  value  —  per  ton, 
barrel,  etc. 

NOTE.  —  Values  as  aforesaid  should  not  be  estimated 
on  the  basis  of  the  assumed  salable  value  of  the  output 
under  current  operative  conditions,  less  the  actual  cost 
of  production,  because,  as  hereinbefore  stated,  the  sell- 
ing price  under  such  conditions  comprehends  a  profit 
both  for  carrying  the  investment  in  minerals,  improve- 
ments, and  working  capital,  and  for  conducting  opera- 
tions in  respect  of  production  and  disposal  of  product. 
The  value  to  be  determined  as  stated  must  be  on  the  basis 
of  the  salable  value  of  the  entire  deposit  of  the  aggregate 
units  of  minerals  considered  en  bloc  if  disposed  of  in  that 
form.  Nor  must  such  valuation  comprehend  any  specula- 
tive value  which  might  attach  to  a  sale  of  the  minerals  en 
bloc,  i.  e.,  a  value  which  might  be  obtained  on  the  ground 
that  the  future  would  develop  a  much  greater  reserve  of 
mineral  deposits  than  were  believed  to  exist  at  the  time 
estimate  as  of  January  1,  1909,  was  formed.  Any  value 
of  this  latter  character  would  attach  obviously  to  such 
additional  reserves  when  developed  in  future. 

100.  The  unit  value  as  of  January  1,  1909, 
ascertained  as  above  outlined,  would  indicate 
the  value  to  be  attached  at  that  date  to  the 
capital  assets  disposed  of  during  any  calendar 
year  succeeding,  and  should  be  used  in  deter- 
mining the  unearned  increment  at  January  1, 
1909,  which  may  be  excluded  entirely  from  the 


DEPRECIATION   IN   MINERALS,  ETC.         167 

item  of  gross  income,  as  before  explained,  in 
following  manner,  viz. : 

Value  at  Jan.  1, 1909,  determined  in  manner 
outlined,  of  minerals,  etc.,  which  may  be 
removed  and  disposed  of  in  any  year  sub- 
sequent thereto $00.00 

Less  the  following: 

(a)  Proportion  of  depreciation  charge  apply- 
ing to  exhaustion  of  minerals  disposed 
of,  ascertained  as  first  explained  herein 
on  basis  of  original  cost 00.00 

(6)  Royalty  paid,  if  any,  on  minerals  disposed 

of 00.00 

Balance,  being  unearned  increment  at  Jan. 
1, 1909,  to  be  excluded  from  gross-income 
item 00.00 

101.  The  precise  detailed  manner  in  which 
the  estimate  of  value  of  minerals,  etc.,  as  at 
January  1, 1909,  shall  be  formed,  must  naturally 
be  determined  upon  by  each  corporation  in- 
terested, but  formal  record  of  such  estimates, 
together  with  all  sustaining  information,  should 
be  carefully  filed  so  as  to  be  readily  accessible 
for  reference.  Values  as  stated,  as  determined 
at  January  1,  1909,  should  be  used  in  compila- 
tion in  all  subsequent  years'  excise-tax  returns. 
The  question  as  to  whether  it  subsequently 
develops  the  property  possessed  a  greater 
quantity  of  mineral,  etc.,  reserve  than  was  in 
the  aggregate  estimated  as  of  January  1,  1909, 


168  INCOME   TAX   LAW   EXPLAINED 

is  immaterial.  Any  excess  which  may  be  devel- 
oped will  be  considered  as  possessing  the  same 
value  at  January  1,  1909,  as  that  which  then 
may  have  been  known  to  be  in  the  property. 

102.  Each    excise-tax    return    (Form    637) 
should    be    accompanied    with    memorandum 
setting  forth  the  extent  in  amount  of  the  ex- 
clusion made  from  the  item  gross  income  for 
unearned  increment  realized  during  the  year, 
as  above  outlined. 

103.  As  the  amount  to  be  deducted  for  de- 
preciation  (paragraph  2  preceding)   is  to  be 
formed  on  basis  of  the  estimated  reserve  of 
minerals,  etc.,  it  follows  that  if  it  develops 
such   estimate   is    understated,    the    cost    in- 
vestment in  the  capital  asset  may  be  wholly 
extinguished  before  all   mineral   reserves   are 
removed.    When  this  is  reached,  further  deduc- 
tions for  exhaustion  of  minerals  should  be  dis- 
continued, but  in  such  event,  it  will  be  noted, 
the  allowance  for  unearned  increment  which 
is  to  be  excluded  entirely  from  gross  income 
will  be  correspondingly  increased. 

104.  In  case  of  corporations  leasing  mines 
and  paying  royalties  on  minerals,  etc.,  removed, 
the  royalties  paid  are  to  be  treated  as  expenses 
and  deducted  in  ascertaining  net  income,  as 
provided  in  general  regulations.     Any  lease- 
hold investment  which  the  operating  corpora- 


DEPKECIATION   IN  MINERALS,  ETC.         169 

tion  may  have  in  such  properties,  either 
through  a  payment  originally  made  for  ac- 
quirement thereof  or  for  improvements  made 
upon  the  property,  to  be  accounted  for  in  ac- 
cordance with  regulations  governing  depre- 
ciation allowances  and  disposition  of  capital 
assets. 

105.  In  respect  to  properties  of  the  character 
in  question  which  may  be  acquired  by  a  cor- 
poration after  January  1,  1909,  a  deduction 
will  be  allowed  only  as  to  depreciation  arising 
from  exhaustion  based  on  original  cost;  no 
exclusion  from  gross  income  can  be  made  for 
unearned  increment,  as  profit  arising  in  sale 
of  such  capital  assets  applies  wholly  to  the 
period  subsequent  to  January  1,  1909. 

Modifications  of  note  in  item  No.  99,  and 
items  100,  101,  and  103  of  Treas.  Decis.  (1742), 
relative  to  claims  for  unearned  increment  in 
returns  of  annual  net  income  of  mining  cor- 
porations are  stated  in  24  Treas.  Decis.  (1833). 

No.  99.  The  note  is  amended  so  that  it  shall 
read: 

NOTE.  —  Values,  as  aforesaid,  should  not  be  estimated 
on  the  basis  of  the  assumed  salable  value  of  the  output 
under  current  operative  conditions,  less  the  actual  cost  of 
production,  because,  as  hereinbefore  stated,  the  selling 
price  under  such  conditions  comprehends  a  profit  both 


170  INCOME   TAX   LAW   EXPLAINED 

for  carrying  the  investment  in  coals,  etc.,  improvements 
and  working  capital,  and  for  conducting  operations  in 
respect  of  production  and  disposal  of  product.  The  value 
to  be  determined  as  stated  must  be  on  the  basis  of  the 
salable  value  en  bloc  of  the  entire  deposit  of  minerals  and 
mineralized  property  owned,  exclusive  of  improvements 
and  development  work,  if  the  same  were  disposed  of  in 
that  form. 

No.  100  is  amended  to  read: 

The  unit  value  as  of  January  1,  1909,  ascer- 
tained as  above  outlined,  would  indicate  the 
value  to  be  attached  at  that  date  to  the  capital 
assets  disposed  of  during  any  calendar  year 
succeeding.  The  amount  claimed  as  a  deduc- 
tion from  gross  income  on  account  of  unearned 
increment  shall  be  shown  separately  in  the 
deductions  from  gross  income  in  the  return  of 
annual  net  income. 

No.  101  is  amended  to  read: 

The  precise  detailed  manner  in  which  the 
estimate  of  value  of  minerals,  etc.,  as  at  January 
1,  1909,  shall  be  formed,  must  naturally  be  de- 
termined by  each  corporation  interested.  Every 
corporation  claiming  and  making  a  deduction 
for  unearned  increment,  as  provided  in  section 
100  preceding,  shall  maintain  an  official  book 
record  of  the  properties  owned  by  it  in  con- 
nection with  which  unearned  increment  is 
claimed,  and  which  record  shall  show  the 
general  ledger  or  general  balance  sheet  value 


DEPRECIATION   IN   MINERALS,  ETC.         171 

thereof,  together  with  the  estimated  amount 
of  appreciated  value  in  such  properties  in  excess 
of  general  balance  sheet  values,  as  of  January 
1,  1909,  together  with  all  evidence  and  in- 
formation on  basis  of  which  such  appreciated 
value  was  formed.  This  estimate  must  be 
formed  on  the  lines  and  basis  indicated  in  the 
"note,"  section  99,  namely,  the  salable  value 
of  the  entire  deposit  considered  en  bloc.  This 
record  should  also  present  clearly  and  fully  the 
transactions  during  each  year  in  respect  of 
quantities  of  minerals  disposed  of  and  for  which 
deductions  are  made  respectively  for  depre- 
ciation and  unearned  increment,  together  with 
the  amount  thereof.  No  deduction  for  unearned 
increment  will  be  allowed  unless  the  aforesaid 
record  is  kept,  nor  unless  the  evidence  as  to  the 
estimates  of  quantity  of  minerals  in  deposit  and 
the  valuation  thereof  are  accepted  by  the  depart- 
ment. Values  determined  and  recorded  as  of 
January  1,  1909,  as  aforesaid,  should  be  used 
in  the  compilation  of  all  subsequent  years' 
excise  tax  returns. 

In  case  it  subsequently  develops  the  property 
possesses  a  greater  quantity  of  mineral,  etc., 
reserve  than  was  in  the  aggregate  estimated  as 
of  January  1,  1909,  only  such  an  amount  of 
aggregate  value  can  be  assigned  to  such  excess 
mineral  tonnage  as  of  January  1,  1909,  as  it 


172  INCOME   TAX   LAW   EXPLAINED 

was  at  said  date  estimated  by  the  company 
attached  to  the  property  and  was  not  assigned 
by  it,  as  hereinbefore  provided,  to  the  special 
tonnage  in  the  property. 

No.  103  is  amended  to  read: 

As  the  amount  to  be  deducted  for  deple- 
tion of  deposits  (Regulation  No.  101)  is  to  be 
formed  on  basis  of  the  estimated  reserve  of 
minerals,  etc.,  it  follows  that  if  it  develops 
such  estimate  is  understated,  the  cost  invest- 
ment and  estimated  unearned  increment  in 
the  capital  asset  may  be  wholly  extinguished 
before  all  mineral  reserves  are  removed.  When 
this  is  reached,  further  deductions  for  exhaus- 
tion of  minerals  should  be  discontinued. 

Regulation  to  govern  the  ascertainment  of 
the  rate  of  depletion  of  deposits  and  the 
return  of  cash  investment  to  corporations  with 
respect  to  natural  gas-producing  properties 
may  be  found  in  22  Treas.  Decis.  (1754).  See 
(1675). 

Regulation  to  govern  the  ascertainment  of 
the  rate  of  depletion  of  deposits  and  the  return 
of  cash  investment  to  corporations  with  respect 
to  petroleum-producing  properties  is  given  in 
22  Treas.  Decis.  (1755). 

In  United  States  v.  Nipissing  Mines  Co.,  202 
Fed.  Rep.  803,  it  was  held  that  a  mining  cor- 
poration engaged  in  extracting  ore  from  its 


DEPRECIATION   IN  MINERALS,  ETC.         173 

mines  was  entitled  to  an  allowance  for  depre- 
ciation equal  to  the  value  in  place  of  the  ore 
extracted  and  disposed  of  during  the  year. 

(d)  When  the  assessment  shall  be  made, 
as  provided  in  this  section,  the  returns, 
together  with  any  corrections  thereof  which 
may  have  been  made  by  the  commissioner, 
shall  be  filed  in  the  office  of  the  Com- 
missioner of  Internal  Revenue  and  shall 
constitute  public  records  and  be  open 
to  inspection  as  such:  Provided,  that  any 
and  all  such  returns  shall  be  open  to  inspec- 
tion only  upon  the  order  of  the  President, 
under  rules  and  regulations  to  be  prescribed 
by  the  Secretary  of  the  Treasury  and  ap- 
proved by  the  President:  Provided  further, 
that  the  proper  officers  of  any  State  im- 
posing a  general  income  tax  may,  upon 
the  request  of  the  governor  thereof,  have 
access  to  said  returns  or  to  an  abstract 
thereof,  showing  the  name  and  income 
of  each  such  corporation,  joint-stock  com- 
pany, association  or  insurance  company, 


174  INCOME   TAX   LAW   EXPLAINED 

at  such  times  and  in  such  manner  as  the 
Secretary  of  the  Treasury  may  prescribe. 

If  any  of  the  corporations,  joint-stock 
companies  or  associations,  or  insurance 
companies  aforesaid,  shall  refuse  or  neglect 
to  make  a  return  at  the  time  or  times  here- 
inbefore specified  in  each  year,  or  shall 
render  a  false  or  fraudulent  return,  such 
corporation,  joint-stock  company  or  asso- 
ciation, or  insurance  company  shall  be 
liable  to  a  penalty  of  not  exceeding  $10,000. 

The  first  part  of  this  sub-section  is  identical 
with  " Sixth"  of  the  act  of  1909.  The  part  be- 
ginning with  "Provided"  is  taken  from  appro- 
priation acts.  See  36  U.  S.  Stats,  at  Large,  494. 
The  provision  beginning  "Provided  further" 
is  new.  The  last  part  beginning  with  "If  any 
of  the  corporations"  is  identical  with  the  first 
part  of  "Eighth"  in  the  act  of  1909  except 
that  in  that  act  the  penalty  is  "not  less  than 
one  thousand  dollars  and  not  exceeding  ten 
thousand  dollars." 

The  executive  order,  together  with  regula- 
tions signed  by  the  Secretary  and  approved  by 
the  President,  relative  to  the  inspection  of 


DEPRECIATION  IN  MINERALS,  ETC.    175 

returns  under  the  act  of  1909,  is  given  in  19 
Treas.  Decis.  (1665),  and  is  as  follows: 

"1.  The  return  of  every  corporation  shall 
be  open  to  the  inspection  of  the  proper  officers 
and  employees  of  the  Treasury  Department. 
Where  access  to  any  return  is  desired  by  an 
officer  or  employee  of  any  other  department  of 
the  Government,  an  application  for  permission 
to  inspect  such  return,  setting  out  the  reasons 
therefor,  shall  be  made  in  writing,  signed  by 
the  head  of  the  executive  department  or  other 
government  establishment  in  which  such  offi- 
cer or  employee  is  employed,  and  transmitted 
to  the  Secretary  of  the  Treasury.  If,  however, 
the  return  is  desired  to  be  used  in  any  legal  pro- 
ceedings, or  to  be  used  in  any  manner  by  which 
any  information  contained  in  the  return  could 
be  made  public,  or  access  to  any  return  is  de- 
sired by  any  official  of  any  State  or  Territory 
of  the  United  States,  the  application  for  per- 
mission to  inspect  such  return  shall  be  referred 
to  the  Attorney-General,  and  if  recommended 
by  him  transmitted  to  the  Secretary  of  the 
Treasury. 

"2.  The  Secretary  of  the  Treasury,  at  his 
discretion,  upon  application  to  him  made,  set- 
ting forth  what  constitutes  a  proper  showing  of 
cause,  may  permit  inspection  of  the  return  of 
any  corporation  by  any  bona  fide  stockholder 


176  INCOME   TAX   LAW   EXPLAINED 

in  such  corporation.  The  person  desiring  to 
inspect  such  return  shall  make  application,  in 
writing,  to  the  Secretary  of  the  Treasury,  set- 
ting forth  the  reasons  why  he  should  be  per- 
mitted to  make  such  inspection,  and  shall  attach 
to  his  application  a  certificate  signed  by  the 
president,  or  other  principal  officer,  of  such 
corporation,  countersigned  by  the  secretary, 
under  the  corporate  seal  of  the  company,  that 
he  is  a  bona  fide  stockholder  in  said  company. 
(Where  this  certificate  cannot  be  secured,  other 
evidence  will  be  considered  by  the  Secretary  of 
the  Treasury  to  determine  the  fact  whether  or 
not  the  applicant  is  a  bona  fide  stockholder  and 
therefore  entitled  to  inspect  the  return  made  by 
such  company.)  The  privilege  of  inspecting 
the  return  of  any  corporation  is  personal  to  the 
stockholders,  and  the  permission  granted  by 
the  Secretary  cannot  be  delegated  to  any  other 
person. 

"3.  The  returns  of  the  following  corporations 
shall  be  open  to  the  inspection  of  any  person, 
upon  written  application  to  the  Secretary  of 
the  Treasury,  which  application  shall  set  forth 
briefly  and  succinctly  all  facts  necessary  to 
enable  the  Secretary  to  act  upon  the  request: 

"(a)  The  returns  of  all  companies  whose 
stock  is  listed  upon  any  duly  organized  and 
recognized  stock  exchange  within  the  United 


DEPRECIATION   IN   MINERALS,  ETC.         177 

States,  for  the  purpose  of  having  its  shares 
dealt  in  by  the  public  generally. 

"  (b)  All  corporations  whose  stock  is  adver- 
tised in  the  press  or  offered  to  the  public  by  the 
corporation  itself  for  sale.  In  case  of  doubt  as  to 
whether  any  company  falls  within  the  classifi- 
cation above,  the  person  desiring  to  see  such 
return  should  make  application,  supported  by 
advertisements,  prospectus,  or  such  other  evi- 
dence as  he  may  deem  proper  to  establish  the 
fact  that  the  stock  of  such  corporation  is  offered 
for  general  public  sale. 

"  Returns  can  be  seen  only  in  the  office  of  the 
Commissioner  of  Internal  Revenue,  in  Washing- 
ton, D.  C.  In  no  case  shall  any  collector,  or 
any  other  internal-revenue  officer  outside  of  the 
Treasury  Department  in  Washington,  permit 
to  be  seen  any  return  or  furnish  any  information 
whatsoever  relative  to  any  return  or  any  in- 
formation secured  by  him  in  his  official  capacity 
relating  to  such  return. 

"No  provision  is  made  in  the  law  for  furnish- 
ing a  copy  of  any  return  to  any  person,  and  no 
copy  of  any  return  will  be  furnished  except  to 
the  corporation  making  the  return,  or  its  duly 
constituted  attorney. " 

The  following  are  rulings  and  decisions  under 
the  act  of  1909  as  to  refusal  or  neglect  to  make 
return  and  as  to  false  or  fraudulent  returns: 


178  INCOME   TAX   LAW   EXPLAINED 

Assessed  taxes  are  held  to  be  due  and  payable 
ten  days  after  actual  mailing  of  notice  and  de- 
mand. Form  17.  19  Treas.  Decis.  (1659).  See 
U.  S.  Rev.  Sts.  §  3184. 

If  a  bank  receives  the  amount  due  but  fails 
to  turn  the  same  over  to  the  Collector  to  be 
placed  to  the  credit  of  the  U.  S.  Treasurer  in 
time  to  avoid  the  liability  to  five  per  cent 
penalty  as  imposed  by  §  3184,  U.  S.  Rev.  Sts., 
holding  the  same  eleven  days,  this  is  no  reason 
why  the  penalty  should  not  be  demanded. 
19  Treas.  Decis.  (1651). 

No  authority  is  vested  in  administrative  offi- 
cers to  relieve  corporations  from  the  additional 
tax  of  fifty  per  cent.  20  Treas.  Decis.  (1701). 

In  General  Inspection  Co.  v.  United  States, 
24  Treas.  Decis.  (1850),  judgment  in  favor  of 
the  United  States  for  tax,  five  per  cent  penalty, 
interest  and  costs  was  affirmed.  See  192  Fed. 
Rep.  223. 

It  is  provided  by  the  act  of  March  3,  1913, 
c.  120,  that  any  corporation,  etc.,  liable  for  any 
additional  tax  for  neglect  to  file  a  return  on  or 
before  March  first  of  any  year  may  within  one 
year  after  passage  of  the  act,  or  within  one  year 
after  the  date  of  notice  of  assessment  where  such 
notice  is  given  after  the  passage  of  the  act, 
"  make  application  to  the  Commissioner  of  In- 
ternal Revenue  for  a  refund  of  such  additional 


DEPRECIATION   IN   MINERALS,  ETC.         179 

tax.  And  the  Commissioner  of  Internal  Rev- 
enue, with  the  advice  and  consent  of  the  Solici- 
tor of  Internal  Revenue,  is  hereby  directed  to 
remit,  abate,  or  pay  back  all  such  additional 
taxes  in  excess  of  $100  for  any  single  year  when- 
ever in  any  case  it  appears  to  his  satisfaction 
that  the  additional  tax  was  assessed  or  imposed 
solely  because  of  a  neglect  to  make  a  return  at 
the  time  or  times  specified  in  said  act,  and  with- 
out any  intention  or  design  on  the  part  of  any 
officer  of  such  corporation,  etc.,  to  hinder  or 
delay  the  United  States  in  the  collection  of  the 
tax  originally  assessed." 

"  Claims  for  abatement  or  refunding  under 
the  provisions  of  the  foregoing  act  shall  be 
made  on  Forms  47  or  46,  respectively,  executed 
in  the  usual  manner  and  filed  with  the  collector 
of  the  district  in  which  the  claimant  was  as- 
sessed or  paid  its  tax,  to  be  by  him  entered  on 
his  record  and  certified  to  the  Commissioner  of 
Internal  Revenue.  Such  claims  should  be  ac- 
companied by  an  affidavit  of  its  president,  vice- 
president,  or  other  principal  officer,  and  its 
treasurer  or  assistant  treasurer,  stating  specifi- 
cally that  the  neglect  to  make  the  annual  return 
of  the  claimant  at  the  time  required  by  law  was 
without  any  intention  or  design  on  the  part  of 
any  officer  of  such  claimant  to  hinder  or  delay 
the  United  States  in  the  collection  of  the  tax 


180  INCOME   TAX   LAW  EXPLAINED 

originally  assessed,  and  setting  forth  in  detail 
the  cause  or  causes  which  produced  the  delay 
in  filing  the  said  annual  return  in  the  time  and 
manner  prescribed  by  law."  24  Treas.  Decis. 
(1838).  ' 

In  a  communication  dated  December  5,  1911, 
21  Treas.  Decis.  (1740),  the  Commissioner  says 
that,  when  proceedings  are  instituted,  the  office 
suggests  a  civil  action  for  the  penalty  instead  of 
proceeding  by  indictment  in  a  criminal  action. 
"The  amount  of  the  penalty  is  to  be  determined 
by  the  court  after  a  verdict  for  the  plaintiff 
within  the  limits  stated." 

The  Commissioner  states  in  a  communication 
dated  May  1,  1913,  24  Treas.  Decis.  (1848) : 

"It  is  not  the  policy  of  this  office  to  involve 
citizens  in  litigation  for  this  offence  without  first 
giving  them  an  opportunity  to  settle  their  con- 
troversies with  the  Government  by  compromise. 
However,  where  the  delinquent  corporation 
has  been  notified  of  its  privilege  to  make  an  offer 
hi  compromise,  but  refuses  or  neglects,  and  has 
sufficient  assets  from  which  a  judgment  would 
be  collectible,  there  is  no  option  except  to  re- 
port it  to  the  United  States  attorney,  as  the 
law  requires.  In  reporting  a  case  to  the  United 
States  attorney,  you  will  please  give  the  location 
of  the  office  of  the  corporation  and  the  names 
and  addresses  of  its  officers,  with  your  opinion 


DEPRECIATION   IN   MINERALS,  ETC.         181 

as  to  there  being  sufficient  assets  to  make  a 
judgment  collectible.  It  is  suggested  that  be- 
fore recommending  prosecution  a  deputy  col- 
lector should  be  instructed  to  call  upon  the 
corporation  to  ascertain  if  it  is  now  engaged  in 
business,  and  the  name  of  the  party  to  be  served 
with  papers  if  suit  is  brought,  and  that  it  does 
not  propose  to  make  any  overtures  for  settle- 
ment by  way  of  compromise,  or  that  the  revenue 
agent  of  the  division  be  requested  to  make  the 
necessary  investigation. " 

Instructions  relative  to  offers  in  compromise 
are  given  in  20  Treas.  Decis.  (1698).  Offers  of 
less  than  $10  are  too  trivial.  Same  decision. 
Instructions  as  to  compromise  are  also  given 
in  20  Treas.  Decis.  (1692).  The  provisions  as 
to  the  Commissioner  of  Internal  Revenue,  with 
the  consent  of  the  Secretary  of  the  Treasury, 
compromising  civil  or  criminal  cases  under 
the  internal  revenue  laws,  are  found  in  U.  S. 
Rev.  Sts.  §  3229.  See  also  §  3469;  Foster  & 
Abbot,  228. 

Where  a  civil  action  is  brought  to  recover  a 
penalty,  the  verdict  must  fix  the  amount,  after 
which  the  only  remedy  (other  than  appeal)  is 
an  application  for  a  compromise  under  U.  S. 
Rev.  Sts.  §§  3229,  3469.  United  States  v.  Acorn 
Roofing  Co.,  204  Fed.  Rep.  157. 

In  a  letter  in  24  Treas.  Decis.  (1852),  ad- 


182  INCOME   TAX   LAW   EXPLAINED 

dressed  to  a  Collector  of  Internal  Revenue,  and 
dated  May  29,  1913,  the  Commissioner  says, 
"  Relative  to  delinquent  corporations  in  your 
district,  which  went  out  of  existence  during 
1912,  leaving  no  assets,  after  having  transacted 
business  during  a  portion  of  said  year,  you  are 
advised  that  the  former  officers  of  such  corpora- 
tions can  not  be  held  individually  liable  for  the 
penalty  prescribed  by  law,  nor  are  the  individ- 
ual funds  or  assets  of  stockholders  available. 
If,  however,  a  corporation  has  gone  out  of 
business,  leaving  assets  which  have  been  dis- 
tributed among  the  stockholders,  such  assets  are 
held  to  be  available  for  collection  of  the  tax 
(T.  D.  1615),  but  not  for  the  penalty.  In  this 
connection,  your  attention  is  called  to  T.  D. 
1710  and  T.  D.  1848,  containing  general  in- 
structions to  collectors,  in  accordance  with 
which  you  may,  without  asking  for  instructions 
from  this  office,  eliminate  from  your  delinquent 
list  corporations  which  have  done  no  business 
at  all  during  the  preceding  calendar  year,  or 
which  have  gone  out  of  business  leaving  no 
assets,  or  which,  if  still  in  business,  have  no 
assets  from  which  judgment  could  be  collected, 
or  which,  with  their  officers,  can  not  be  located 
after  due  investigation. "  See  20  Treas.  Decis. 
(1673). 
The  penalty  of  from  $1,000  to  $10,000  for 


"STATE"  OR  "UNITED  STATES"        183 

failure  to  make  return  under  the  act  of  1909  was 
held  constitutional.  United  States  v.  Surprise, 
25  Treas.  Decis.  (1864).  The  acceptance  of  a 
return  by  the  Commissioner  was  held  not  a 
waiver  of  the  penalty.  Same  case.  Penalties 
for  delay  are  a  necessary  incident  to  procuring 
revenue  and  should  receive  an  impartial,  if  not 
a  sympathetic,  interpretation.  Same  case. 


MEANING  OF  "STATE"  OR  "UNITED 
STATES" 

H.  That  the  word  "State"  or  "United 
States"  when  used  in  this  section  shall  be 
construed  to  include  any  Territory,  Alaska, 
the  District  of  Columbia,  Porto  Rico, 
and  the  Philippine  Islands,  vrhen  such 
construction  is  necessary  to  carry  out  its 
provisions. 


184         INCOME  TAX  LAW  EXPLAINED 

PENALTY  FOR  REVENUE  OFFICERS  DIS- 
CLOSING OPERATIONS,  ETC.,  OF  MANU- 
FACTURERS, INCOME  RETURNS,  ETC.  — 
CANVASS  OF  DISTRICTS  FOR  OBJECTS  OF 
TAXATION  —  ANNUAL  RETURNS  OF  PER- 
SONS, ETC.,  LIABLE  TO  TAX  —  WHEN 
COLLECTOR  OR  DEPUTY  MAY  MAKE 
RETURN  —  NOTICE  TO  MAKE  RETURN 

—  PRODUCTION  OF  BOOKS  OF  ACCOUNT 

—  PENALTIES. 

I.  That  sections  thirty-one  hundred  and 
sixty-seven,  thirty-one  hundred  and  sev- 
enty-two, thirty-one  hundred  and  sev- 
enty-three, and  thirty-one  hundred  and 
seventy-six  of  the  Revised  Statutes  of 
the  United  States  as  amended  are  hereby 
amended  so  as  to  read  as  follows: 

SEC.  3167.  It  shall  be  unlawful  for  any 
collector,  deputy  collector,  agent,  clerk, 
or  other  officer  or  employee  of  the  United 
States,  to  divulge  or  to  make  known 
in  any  manner  whatever  not  provided 
by  law  to  any  person  the  operations,  style 
of  work,  or  apparatus  of  any  manufac- 


PENALTIES,  RETURNS,  ACCOUNTS    185 

turer  or  producer  visited  by  him  in  the  dis- 
charge of  his  official  duties,  or  the  amount 
or  source  of  income,  profits,  losses,  ex- 
penditures, or  any  particular  thereof,  set 
forth  or  disclosed  in  any  income  return 
by  any  person  or  corporation,  or  to  per- 
mit any  income  return  or  copy  thereof 
or  any  book  containing  any  abstract  or 
particulars  thereof  to  be  seen  or  examined 
by  any  person  except  as  provided  by 
law;  and  it  shall  be  unlawful  for  any  per- 
son to  print  or  publish  in  any  manner 
whatever  not  provided  by  law  any  income 
return  or  any  part  thereof  or  the  amount 
or  source  of  income,  profits,  losses,  or  ex- 
penditure appearing  in  any  income  return; 
and  any  offence  against  the  foregoing  pro- 
vision shall  be  a  misdemeanor  and  be  pun- 
ished by  a  fine  not  exceeding  $1,000  or  by 
imprisonment  not  exceeding  one  year,  or 
both,  at  the  discretion  of  the  court;  and  if 
the  offender  be  an  officer  or  employee  of 
the  United  States  he  shall  be  dismissed 
from  office  and  be  incapable  thereafter, 


186  INCOME   TAX   LAW   EXPLAINED 

of  holding  any  office  under  the  Govern- 
ment. 

SEC.  3172.  Every  collector  shall,  from 
time  to  time,  cause  his  deputies  to  pro- 
ceed through  every  part  of  his  district  and 
inquire  after  and  concerning  all  persons 
therein  who  are  liable  to  pay  any  internal- 
revenue  tax,  and  all  persons  owning  or 
having  the  care  and  management  of  any 
objects  liable  to  pay  any  tax,  and  to 
make  a  list  of  such  persons  and  enumerate 
said  objects. 

SEC.  3173.  It  shall  be  the  duty  of  any 
person,  partnership,  firm,  association,  or 
corporation,  made  liable  to  any  duty, 
special  tax,  or  other  tax  imposed  by  law, 
when  not  otherwise  provided  for,  in  case 
of  a  special  tax,  on  or  before  the  thirty- 
first  day  of  July  in  each  year,  in  case  of 
income  tax  on  or  before  the  first  day  of 
March  in  each  year,  and  in  other  cases 
before  the  day  on  which  the  taxes  accrue, 
to  make  a  list  or  return,  verified  by  oath 
or  affirmation,  to  the  collector  or  a  deputy 


PENALTIES,  RETURNS,  ACCOUNTS  187 

collector  of  the  district  where  located, 
of  the  articles  or  objects,  including  the 
amount  of  annual  income  charged  with  a 
duty  or  tax,  the  quantity  of  goods,  wares, 
and  merchandise  made  or  sold  and  charged 
with  a  tax,  the  several  rates  and  aggregate 
amount,  according  to  the  forms  and  regu- 
lations to  be  prescribed  by  the  Commis- 
sioner of  Internal  Revenue,  with  the  ap- 
proval of  the  Secretary  of  the  Treasury, 
for  which  such  person,  partnership,  firm, 
association,  or  corporation  is  liable:  Pro- 
vided, that  if  any  person  liable  to  pay  any 
duty  or  tax,  or  owning,  possessing,  or 
having  the  care  or  management  of  prop- 
erty, goods,  wares,  and  merchandise,  ar- 
ticles or  objects  liable  to  pay  any  duty, 
tax,  or  license  shall  fail  to  make  and 
exhibit  a  list  or  return  required  by  law, 
but  shall  consent  to  disclose  the  particu- 
lars of  any  and  all  the  property,  goods, 
wares,  and  merchandise,  articles,  and  ob- 
jects liable  to  pay  any  duty  or  tax,  or 
any  business  or  occupation  liable  to  pay 


188  INCOME   TAX   LAW  EXPLAINED 

any  tax  as  aforesaid,  then,  and  in  that  case, 
it  shall  be  the  duty  of  the  collector  or  deputy 
collector  to  make  such  list  or  return,  which, 
being  distinctly  read,  consented  to,  and 
signed  and  verified  by  oath  or  affirmation 
by  the  person  so  owning,  possessing,  or 
having  the  care  and  management  as  afore- 
said, may  be  received  as  the  list  of  such 
person:  Provided  further,  that  in  case  no 
annual  list  or  return  has  been  rendered  by 
such  person  to  the  collector  or  deputy 
collector  as  required  by  law,  and  the  per- 
son shall  be  absent  from  his  or  her  resi- 
dence or  place  of  business  at  the  time  the 
collector  or  a  deputy  collector  shall  call 
for  the  annual  list  or  return,  it  shall  be  the 
duty  of  such  collector  or  deputy  collector  to 
leave  at  such  place  of  residence  or  business, 
with  some  one  of  suitable  age  and  discre- 
tion, if  such  be  present,  otherwise  to  de- 
posit in  the  nearest  post  office,  a  note 
or  memorandum  addressed  to  such  person, 
requiring  him  or  her  to  render  to  such  col- 
lector or  deputy  collector  the  list  or  return 


PENALTIES,  RETURNS,  ACCOUNTS  189 

required  by  law  within  ten  days  from  the 
date  of  such  note  or  memorandum,  verified 
by  oath  or  affirmation.  And  if  any  person, 
on  being  notified  or  required  as  aforesaid, 
shall  refuse  or  neglect  to  render  such  list  or 
return  within  the  time  required  as  afore- 
said, or  whenever  any  person  who  is  re- 
quired to  deliver  a  monthly  or  other  return 
of  objects  subject  to  tax  fails  to  do  so  at 
the  time  required,  or  delivers  any  return 
which,  in  the  opinion  of  the  collector, 
is  false  or  fraudulent,  or  contains  any 
undervaluation  or  understatement,  it  shall 
be  lawful  for  the  collector  to  summon 
such  person,  or  any  other  person  having 
possession,  custody,  or  care  of  books  of 
account  containing  entries  relating  to  the 
business  of  such  person,  or  any  other 
person  he  may  deem  proper,  to  appear 
before  him  and  produce  such  books,  at 
a  time  and  place  named  in  the  summons, 
and  to  give  testimony  or  answer  inter- 
rogatories, under  oath,  respecting  any  ob- 
jects liable  to  tax  or  the  returns  thereof. 


190  INCOME   TAX   LAW   EXPLAINED 

The  collector  may  summon  any  person 
residing  or  found  within  the  State  in  which 
his  district  lies;  and  when  the  person  in- 
tended to  be  summoned  does  not  reside 
and  can  not  be  found  within  such  State, 
he  may  enter  any  collection  district  where 
such  person  may  be  found  and  there  make 
the  examination  herein  authorized.  And  to 
this  end  he  may  there  exercise  all  the 
authority  which  he  might  lawfully  exer- 
cise in  the  district  for  which  he  was  com- 
missioned. 

SEC.  3176.  When  any  person,  corpora- 
tion, company,  or  association  refuses  or 
neglects  to  render  any  return  or  list  re- 
quired by  law,  or  renders  a  false  or  fraud- 
ulent return  or  list,  the  collector  or  any 
deputy  collector  shall  make,  according  to 
the  best  information  which  he  can  obtain, 
including  that  derived  from  the  evidence 
elicited  by  the  examination  of  the  collector, 
and  on  his  own  view  and  information,  such 
list  or  return,  according  to  the  form  pre- 
scribed, of  the  income,  property,  and  ob- 


PENALTIES,  RETURNS,  ACCOUNTS  191 

jects  liable  to  tax  owned  or  possessed  or 
under  the  care  or  management  of  such 
person  or  corporation,  company  or  associa- 
tion, and  the  Commissioner  of  Internal 
Revenue  shall  assess  all  taxes  not  paid  by 
stamps,  including  the  amount,  if  any,  due 
for  special  tax,  income  or  other  tax,  and 
in  case  of  any  return  of  a  false  or  fraud- 
ulent list  or  valuation  intentionally  he 
shall  add  one  hundred  per  centum  to  such 
tax;  and  in  case  of  a  refusal  or  neglect, 
except  in  cases  of  sickness  or  absence,  to 
make  a  list  or  return,  or  to  verify  the 
same  as  aforesaid,  he  shall  add  fifty  per 
centum  to  such  tax.  In  case  of  neglect 
occasioned  by  sickness  or  absence  as  afore- 
said the  collector  may  allow  such  further 
time  for  making  and  delivering  such  list 
or  return  as  he  may  deem  necessary,  not 
exceeding  thirty  days.  The  amount  so 
added  to  the  tax  shall  be  collected  at  the 
same  time  and  in  the  same  manner  as  the 
tax  unless  the  neglect  or  falsity  is  dis- 
covered after  the  tax  has  been  paid,  in 


192  INCOME   TAX   LAW  EXPLAINED 

which  case  the  amount  so  added  shall  be 
collected  in  the  same  manner  as  the  tax; 
and  the  list  or  return  so  made  and  sub- 
scribed by  such  collector  or  deputy  col- 
lector shall  be  held  prima  facie  good  and 
sufficient  for  all  legal  purposes. 

§  3167.  This  is  identical  with  the  act  of 
August  27,  1894,  c.  349,  §  34,  28  U.  S.  Stats,  at 
Large,  557,  which  enlarged  this  section  as  it 
appeared  in  the  U.  S.  Rev.  Sts.  See  act  of 
February  8, 1875,  c.  36,  §  23, 18  Stats,  at  Large, 
307. 

§  3172.  This  is  identical  with  the  act  of 
August  27,  1894,  c.  349,  §  34,  28  U.  S.  Stats,  at 
Large,  558,  which  changed  this  section  as  it 
appeared  in  the  U.  S.  Sts.  by  substituting  "any 
internal-revenue  tax"  for  "a  special  tax." 

§  3173.  This  is  identical  with  the  act  of 
August  27,  1894,  c.  349,  §  34,  28  U.  S.  Stats,  at 
Large,  558,  which  enlarged  this  section  as  it 
appeared  in  the  U.  S.  Rev.  Sts.  as  amended  by 
act  of  March  1,  1879,  c.  125,  §  3,  20  U.  S.  Stats, 
at  Large,  330. 

§  3176.  This  is  identical  with  the  act  of 
August  27,  1894,  c.  349,  §  34,  28  U.  S.  Stats,  at 
Large,  559,  which  enlarged  this  section  as  it 
appeared  in  the  U.  S.  Rev.  Sts.  as  amended  by 


PENALTIES,  RETURNS,  ACCOUNTS    193 

the  act  of  March  1,  1879,  c.  125,  §  3,  20  U.  S. 
Stats,  at  Large,  331. 

The  fifty  per  cent  to  be  added  to  the  tax  is 
a  penalty,  and  not  a  tax.  17  A.  G.  Op.  433. 
The  penalty  of  one  hundred  per  cent  is  consti- 
tutional. Doll  v.  Evans,  9  Phila.  364.  The 
transmission  of  the  lists  to  the  collector  appar- 
ently terminates  the  power  to  add  to  this  pen- 
alty. 11  Atty.  Gen.  Op.  280.  Upon  the  right 
of  secrecy,  see  §  19  of  act  of  June  30, 1864;  1  Int. 
Rev.  Rec.  4,  6,  19  (column  3),  20;  4  Harvard 
Law  Rev.  193. 

Disclosures  or  admissions,  compelled  from 
taxpayers  required  to  testify  or  make  returns  as 
to  property,  cannot  be  used  as  evidence  in  any 
Federal  court  in  a  criminal  or  quasi-criminal 
prosecution.  Re  Phillips,  10  Int.  Rev.  Rec.  107; 
Landram  v.  United  States,  16  Ct.  Cl.  74,  85; 
Re  Strouse,  1  Sawyer,  605 ;  Re  Lippman,  3  Ben. 
95;  United  States  v.  Fordyce,  13  Int.  Rev. 
Rec.  77. 

Under  early  laws  the  examination  of  taxpay- 
ers and  their  books  was  not  infrequent.  In  the 
act  of  1894,  §  29,  it  was  provided  that,  in  the 
case  of  the  refusal  to  make  a  return  or  of  the 
rendering  a  wilfully  false  return,  the  collector  or 
deputy  was  to  make  the  list  "  according  to  the 
best  information  he  could  obtain,  by  the  ex- 
amination of  such  person,  or  any  other  evi- 


194  INCOME  TAX  LAW  EXPLAINED 

dence,"  etc.  In  the  present  law  it  is  provided 
both  in  the  case  of  individuals  and  corpora- 
tions that  the  Commissioner  of  Internal  Reve- 
nue shall  "at  any  time  within  three  years  after 
said  return  is  due,  make  a  return  upon  informa- 
tion obtained  as  provided  for  in  this  section,  or 
by  existing  law."  See  pp.  189,  195.  This 
section  (3173)  is  identical  in  both  acts.  The 
Federal  Corporation  law  of  1909  contains  in 
section  "Fourth"  a  provision,  which  does  not 
appear  in  the  present  act,  authorizing  the  Com- 
missioner of  Internal  Revenue  to  examine  any 
books  and  papers  and  require  the  attendance 
of  any  officer  or  employee  of  a  corporation,  etc. 
That  the  provisions  of  this  section  (3173)  are 
constitutional  would  appear  by  the  decision  in 
Interstate  Commerce  Commission  v.  Brimson, 
154  U.  S.  447,  sustaining  the  constitutionality 
of  a  very  similar  provision  of  the  Interstate 
Commerce  law. 

"In  Boyd  v.  United  States,  116  U.  S.  616,  the 
fifth  section  of  the  act  of  June  22,  1874,  18  St. 
186,  which  authorized  a  court  of  the  United 
States  in  revenue  cases,  on  motion  of  the  Dis- 
trict Attorney,  to  require  the  defendant  or  the 
claimant  to  produce  in  court  his  private  books, 
invoices  and  papers,  or  else  that  the  allegations 
of  the  attorney  as  to  then*  contents  should  be 
taken  as  confessed,  was  held  unconstitutional 


PENALTIES,  RETURNS,  ACCOUNTS     195 

and  void  as  applied  to  an  action  for  penalties 
or  to  establish  a  forfeiture  of  the  party's  goods, 
because  repugnant  to  the  Fourth  and  Fifth 
Amendments  to  the  Constitution."  Fairbank 
v.  United  States,  181  U.  S.  283,  302. 

As  proceedings  may  be  taken  under  this  sec- 
tion (3173),  its  constitutionality  not  having 
been  actually  tested,  we  give  from  19  Treas. 
Decis.  (1617)  the  Commissioner's  instructions 
approved  by  the  Secretary  of  the  Treasury  rela- 
tive to  action  under  the  repealed  provisions  of 
the  act  of  1909: 

"On  receiving  from  collectors,  or  from  this 
office,  a  list  of  corporations,  etc.,  which  have 
failed  to  file  the  required  returns,  or  which  have 
filed  defective  or  unsatisfactory  returns,  agents 
will  at  once  proceed  to  make  the  investigation 
provided  for  in  the  fourth  paragraph  of  said 
section  38.  They  will  in  each  case,  after 
calling  the  attention  of  the  proper  officer  of  the 
corporation  to  the  provisions  of  the  statute, 
request  the  production  of  such  books  and  papers 
bearing  upon  the  matters  required  to  be 
included  in  the  return  of  such  corporation, 
as  may  be  found  necessary  in  making  the  ex- 
amination here  directed. 

"In  most  cases  the  errors  in  the  returns 
rendered  are  probably  due  to  a  misapprehension 
on  the  part  of  the  officers  of  the  corporation 


196  INCOME  TAX  LAW  EXPLAINED 

as  to  the  requirements  of  the  law  and  regulations 
respecting  the  preparation  of  such  returns. 
...  In  conducting  their  examination  the 
agents  will,  except  in  glaring  cases  of  mis- 
representation, proceed  on  the  assumption  that 
all  errors  in  the  returns  rendered  are  unin- 
tentional; and  they  will,  so  far  as  possible, 
make  their  examination  in  such  manner  as  not 
to  interfere  with  the  company's  business,  either 
as  to  the  use  of  its  books  or  in  the  general  con- 
duct of  its  affairs.  Contentions  with  officers, 
employees  or  representatives  of  corporations 
are  to  be  carefully  avoided  and  no  action  that 
may  cause  friction,  that  is  not  necessary  in 
the  proper  performance  of  their  duties,  must 
be  indulged  in  by  officers  making  these 
examinations. 

"  Ordinarily  no  very  extended  examination 
of  the  company's  books  will  be  necessary,  as 
the  verification  of  the  particular  items  to  which 
attention  has  been  called  will  be  sufficient. 
Where,  however,  a  thorough  examination  is 
found  to  be  necessary,  and  the  accounts  are 
so  kept  as  to  involve  much  labor  in  their 
examination,  the  agent  may  assign  two  assist- 
ants for  this  purpose. 

"  Where  discrepancies  between  the  company's 
books  and  the  return  made  are  discovered,  the 
officers  of  the  company  should  be  given  full 


PENALTIES,  RETURNS,  ACCOUNTS     197 

opportunity  to  explain  the  same,  and  to 
furnish,  if  so  desired,  a  sworn  statement  in 
reference  thereto.  In  such  cases  the  agent 
will,  if  deemed  necessary,  require  the  attendance 
of  any  officer  or  employee  of  the  company,  and 
there  examine  such  officer  or  employee  respect- 
ing the  matter  under  investigation,  as  provided 
in  said  section  38.  The  witnesses  in  such 
cases  should  be  duly  sworn  by  the  agent, 
as  specially  provided  in  said  section  38,  and  in 
case  of  refusal  of  any  such  officer  or  employee 
to  testify,  or  in  case  of  refusal  to  produce  the 
books  or  papers  called  for,  the  agent  will  at 
once  report  the  fact  to  this  office. 

"A  separate  report  of  the  investigation  of 
each  case  should  be  made,  and  where  an  addi- 
tional tax  is  found  to  be  due  a  copy  of  such 
report  should  be  furnished  the  collector  of 
the  district. 

"The  attention  of  agents  and  then-  assistants 
is  specially  called  to  paragraph  7  of  said  section 
38,  making  it  unlawful  for  any  officer  or  em- 
ployee of  the  United  States  to  divulge  or  make 
known,  hi  any  manner  not  provided  by  law, 
any  information  obtained  from  any  document 
received,  evidence  taken,  or  report  made  under 
the  provisions  of  that  section." 


198         INCOME  TAX  LAW  EXPLAINED 

RECEIPT  OF  COLLECTOR  OF  INTERNAL 
REVENUE  FOR  TAXES. 

J.  That  it  shall  be  the  duty  of  every  col- 
lector of  internal  revenue,  to  whom  any 
payment  of  any  taxes  other  than  the 
tax  represented  by  an  adhesive  stamp  or 
other  engraved  stamp  is  made  under  the 
provisions  of  this  section,  to  give  to  the 
person  making  such  payment  a  full  written 
or  printed  receipt,  expressing  the  amount 
paid  and  the  particular  account  for  which 
such  payment  was  made;  and  whenever 
such  payment  is  made  such  collector  shall, 
if  required,  give  a  separate  receipt  for  each 
tax  paid  by  any  debtor,  on  account  of 
payments  made  to  or  to  be  made  by 
him  to  separate  creditors  in  such  form  that 
such  debtor  can  conveniently  produce  the 
same  separately  to  his  several' creditors  in 
satisfaction  of  their  respective  demands 
to  the  amounts  specified  in  such  receipts; 
and  such  receipts  shall  be  sufficient  evi- 
dence in  favor  of  such  debtor  to  justify 


UNITED   STATES   DISTRICT   COURTS         199 

him  in  withholding  the  amount  therein 
expressed  from  his  next  payment  to  his 
creditor;  but  such  creditor  may,  upon 
giving  to  his  debtor  a  full  written  receipt, 
acknowledging  the  payment  to  him  of 
whatever  sum  may  be  actually  paid,  and 
accepting  the  amount  of  tax  paid  as  afore- 
said (specifying  the  same)  as  a  further 
satisfaction  of  the  debt  to  that  amount, 
require  the  surrender  to  him  of  such  col- 
lector's receipt. 

JURISDICTION  OF  THE  UNITED  STATES 
DISTRICT  COURTS. 

K.  That  jurisdiction  is  hereby  conferred 
upon  the  district  courts  of  the  United 
States  for  the  district  within  which  any 
person  summoned  under  this  section  to 
appear  to  testify  or  to  produce  books 
shall  reside,  to  compel  such  attendance, 
production  of  books,  and  testimony  by 
appropriate  process. 


200  INCOME  TAX   LAW  EXPLAINED 

CERTAIN  ADMINISTRATIVE,  ETC.  LAWS  TO 
APPLY. 

L.  That  all  administrative,  special,  and 
general  provisions  of  law,  including  the 
laws  in  relation  to  the  assessment,  remis- 
sion, collection,  and  refund  of  internal- 
revenue  taxes  not  heretofore  specifically 
repealed  and  not  inconsistent  with  the  pro- 
visions of  this  section,  are  hereby  extended 
and  made  applicable  to  all  the  provisions  of 
this  section  and  to  the  tax  herein  imposed. 

PORTO  Rico  AND  THE  'PHILIPPINE  ISLANDS. 

M.  That  the  provisions  of  this  section 
shall  extend  to  Porto  Rico  and  the  Phil- 
ippine Islands:  Provided,  that  the  adminis- 
tration of  the  law  and  the  collection  of  the 
taxes  imposed  in  Porto  Rico  and  the 
Philippine  Islands  shall  be  by  the  appro- 
priate internal-revenue  officers  of  those 
governments,  and  all  revenues  collected 
in  Porto  Rico  and  the  Philippine  Islands 
thereunder  shall  accrue  intact  to  the  gen- 


PORTO  RICO  AND   PHILIPPINES  201 

eral  governments  thereof,  respectively:  And 
provided  further,  that  the  jurisdiction  in 
this  section  conferred  upon  the  district 
courts  of  the  United  States  shall,  so  far 
as  the  Philippine  Islands  are  concerned, 
be  vested  in  the  courts  of  the  first  in- 
stance of  said  islands:  And  provided  fur- 
ther, that  nothing  in  this  section  shall  be 
held  to  exclude  from  the  computation 
of  the  net  income  the  compensation  paid 
any  official  by  the  governments  of  the 
District  of  Columbia,  Porto  Rico,  and  the 
Philippine  Islands  or  the  political  sub- 
divisions thereof. 

[N.  This  sub-section  provides  for  an  ap- 
propriation to  carry  the  law  into  effect.] 

A  part  of  S  of  Section  IV  of  the  present 
tariff  act  provides  as  follows: 

Provided  further,  that  all  excise  taxes 
upon  corporations  imposed  by  section  thirty- 
eight,  act  of  1909,  that  have  accrued  or  have 
been  imposed  for  the  year  ending  December 
thirty-first,  nineteen  hundred  and  twelve, 


202  INCOME   TAX   LAW   EXPLAINED 

shall  be  returned,  assessed,  and  collected 
in  the  same  manner,  and  under  the  same 
provisions,  liens,  and  penalties  as  if  section 
thirty-eight  continued  in  full  force  and 
effect:  And  provided  further,  that  a  special 
excise  tax  with  respect  to  the  carrying  on 
or  doing  of  business,  equivalent  to  one 
per  cent  upon  their  entire  net  income, 
shall  be  levied,  assessed,  and  collected 
upon  corporations,  joint  stock  companies 
or  associations,  and  insurance  compa- 
nies, of  the  character  described  in  section 
thirty-eight  of  the  act  of  August  fifth, 
nineteen  hundred  and  nine,  for  the  period 
from  January  first  to  February  twenty- 
eighth,  nineteen  hundred  and  thirteen, 
both  dates  inclusive,  which  said  tax  shall 
be  computed  upon  one  sixth  of  the  entire 
net  income  of  said  corporations,  joint 
stock  companies  or  associations,  and  in- 
surance companies,  for  said  year,  said  net 
income  to  be  ascertained  in  accordance 
with  the  provisions  of  sub-section  G  of 
section  two  of  this  act:  Provided  further, 


PORTO  RICO   AND   PHILIPPINES  203 

that  the  provisions  of  said  section  thirty- 
eight  of  the  act  of  August  fifth,  nineteen 
hundred  and  nine,  relative  to  the  collec- 
tion of  the  tax  therein  imposed  shall 
remain  in  force  for  the  collection  of  the 
excise  tax  herein  provided,  but  for  the  year 
nineteen  hundred  and  thirteen  it  shall  not 
be  necessary  to  make  more  than  one  re- 
turn and  assessment  for  all  the  taxes  im- 
posed herein  upon  said  corporations,  joint 
stock  companies  or  associations,  and  in- 
surance companies,  either  by  way  of  in- 
come or  excise,  which  return  and  assess- 
ment shall  be  made  at  the  times  and  in 
the  manner  provided  in  this  act;  but  the 
repeal  of  existing  laws  or  modifications 
thereof  embraced  in  this  act  shall  not 
affect  any  act  done,  or  any  right  accruing 
or  accrued,  or  any  suit  or  proceeding  had 
or  commenced  in  any  civil  case  before 
the  said  repeal  or  modification;  but  all 
rights  and  liabilities  under  said  laws  shall 
continue  and  may  be  enforced  in  the  same 
manner  as  if  said  repeal  or  modifications 


204  INCOME  TAX  LAW  EXPLAINED 

had  not  been  made.  Any  offences  com- 
mitted and  all  penalties  or  forfeitures  or 
liabilities  incurred  prior  to  the  passage 
of  this  act  under  any  statute  embraced  in 
or  changed,  modified,  or  repealed  by  this 
act  may  be  prosecuted  or  punished  in  the 
same  manner  and  with  the  same  effect 
as  if  this  act  had  not  been  passed. 

CONSTRUCTION  IN  CASE  OF  INVALIDITY  OF 
ANY  CLAUSE,  ETC. 

T.  and  TL,  which  follow,  are  from  Section 
IV  of  the  present  tariff  act. 

T.  If  any  clause,  sentence,  paragraph, 
or  part  of  this  act  shall  for  any  reason 
be  adjudged  by  any  court  of  competent 
jurisdiction  to  be  invalid,  such  judgment 
shall  not  affect,  impair,  or  invalidate  the 
remainder  of  said  act,  but  shall  be  confined 
in  its  operation  to  the  clause,  sentence, 
paragraph,  or  part  thereof  directly  in- 
volved in  the  controversy  in  which  such 
judgment  shall  have  been  rendered. 


RECENT  POINTS  205 

U.  That  unless  otherwise  herein  spe- 
cially provided,  this  act  shall  take  effect 
on  the  day  following  its  passage. 

RECENT  POINTS. 

The  following  points  or  contentions  have 
recently  come  to  the  attention  of  the  writer: 

Some  contend  that  the  deductions  hi  the 
case  of  single  and  married  people,  in  the  case 
of  the  normal  tax,  apply  as  well  to  the  addi- 
tional tax. 

It  is  urged  that  the  salaries  of  Congressmen 
are  subject  to  the  tax,  inasmuch  as  the  pro- 
vision exempting  officers  and  employees  of  a 
State  or  any  political  subdivision  thereof 
is  followed  by  the  exception  "when  such  com- 
pensation is  paid  by  the  United  States  Govern- 
ment, "  the  contention  being  that  Congressmen 
are  officers  of  the  States  they  represent,  al- 
though their  salaries  are  paid  by  the  National 
Government.  See  p.  38. 

It  is  stated  in  the  New  York  Sun,  of  Oct.  24, 
1913,  that  Mr.  Walker,  an  attorney  thoroughly 
versed  in  the  law  of  corporate  enterprises,  denies 
the  contention  that  the  increase  in  the  value 
of  the  property  of  a  person  or  corporation 
during  a  year  constitutes  taxable  income  for 
that  year  as  being  "accrued,"  on  the  ground 


206  INCOME   TAX   LAW   EXPLAINED 

that  " derived"  income  or  " received"  income, 
not  " accrued"  income,  is  that  stated  in  the 
law  as  taxable;  hence  professional  men  and 
others  receiving  fees  are  not  to  return  as  fees 
the  amount  earned,  though  unpaid;  and  the 
same  rule  applies  to  the  income  of  corporations. 
Mr.  Walker  denies  the  contention  that  debts 
can  be  charged  off  against  income  as  a  deduc- 
tion only  after  legal  proceedings  by  the  cred- 
itor to  recover  have  proved  the  debts  worth- 
less, as  the  law  provides  that  the  taxpayer's 
satisfaction  of  the  debt's  worthlessness  is  suffi- 
cient. Mr.  Walker  denies  the  contention  that 
corporations  have  to  pay  the  tax  on  interest 
received  from  Government,  State  and  Munici- 
pal bonds,  which  are  tax  free,  in  the  hands  of 
individuals.  He  also  holds  that  the  multiple 
taxation  of  income  of  corporations,  which  are 
holding  companies,  is  directed  against  such 
companies,  though  no  such  purpose  is  stated 
in  the  bill. 

It  is  maintained  that  the  proviso  to  C  as 
to  one  deduction  for  husband  and  wife  living 
together  modifies  what  goes  before  and  is 
after  the  nature  of  a  joker.  See  p.  57. 


TREASURY  REGULATIONS  207 

TREASURY  REGULATIONS   AS  TO  COLLEC- 
TION AT  THE  SOURCE  ON  BONDS,  ETC. 

The  following  is  a  brief  statement  of  the 
regulations,  which  are  given  in  full  on  pp.  214 
et  seq.  It  is  provided: 

That  the  normal  tax  of  one  per  cent  shall 
be  deducted  at  "the  source,"  beginning  Nov. 
1,  1913,  from  income  payable  to  (a)  every  citi- 
zen, residing  here  or  abroad,  and  to  (b)  every 
person  residing  here,  though  not  a  citizen, 
derived  from  interest,  although  less  than 
$3,000,  upon  bonds  and  other  obligations 
enumerated,  except  the  interest  upon  obliga- 
tions of  the  United  States  or  its  possessions, 
or  a  State  or  any  political  subdivision 
thereof. 

That  the  term  "Debtor"  means  all  cor- 
porations, joint  stock  companies  or  associa- 
tions, and  insurance  companies. 

That  to  collect  the  tax  on  coupons  and  regis- 
tered interest  payable  in  the  United  States,  the 
source  shall  be  the  debtor  or  its  paying  agent, 
and  no  other  bank,  etc.,  taking  coupons,  etc., 
for  collection  shall  withhold  the  tax,  provided 
that  coupons  or  orders  for  registered  interest 
are  accompanied  by  certificates  of  ownership 
signed  by  the  owners.  A  separate  certificate 
shall  be  made  out  by  each  owner  for  the  coupons 


208  INCOME   TAX   LAW   EXPLAINED 

or  interest  orders  for  each  separate  issue  of 
bonds,  etc.,  of  each  debtor. 

That,  if  the  coupons  or  interest  orders  are  not 
accompanied  by  certificates,  the  final  bank, 
etc.,  receiving  the  coupons,  etc.,  for  collection, 
or  otherwise,  shall  withhold  the  tax  and  shall 
attach  its  own  certificate,  giving  the  name 
and  address  of  the  owner  or  the  person  present- 
ing the  same,  if  the  owner  is  not  known,  with 
a  description  of  the  coupons,  etc.;  also  setting 
forth  that  they  are  withholding  the  tax; 
whereupon  the  debtor  shall  not  again  with- 
hold the  tax,  but  shall  give  the  government  the 
certificate  of  such  bank,  etc.  Corporations 
receiving  from  the  owner  coupons,  etc.,  and 
taking  the  above  certificates  should  require 
those  tendering  the  coupons,  etc.,  to  establish 
their  identity. 

That  a  debtor,  in  case  of  registered  bonds  as 
to  principal  and  interest,  shall  deduct  the  one 
per  cent  from  accruing  interest  before  sending 
checks  to  registered  owners  or  paying  interest 
upon  interest  orders  signed  by  the  registered 
holders  until  there  shall  be  filed  with  the 
debtor  or  its  fiscal  agent  (not  later  than  30 
days  prior  to  March  1),  through  whom  said 
interest  is  customarily  paid,  certificates  claim- 
ing exemption,  executed  as  follows  (1)  by  a  resi- 
dent, the  bona  fide  owner  of  the  registered 


TREASURY  REGULATIONS  209 

obligations,  claiming  exemption  under  Par.  C 
Sect.  2,  of  the  act;  (2)  by  corporations,  etc., 
organized  in  the  United  States,  or  organizations, 
etc.,  either  taxable  or  exempt,  as  provided  in 
Par.  G  (a)  of  the  act;  (3)  by  a  bona  fide 
resident  of  a  foreign  country,  claiming  exemp- 
tion. 

That  a  debtor  may  appoint  fiscal  agents 
upon  filing  with  the  collector  for  its  district 
a  notice  of  the  appointment. 

That,  if  the  owners  of  the  bonds  are  residents 
of  the  United  States,  the  certificate  shall  ac- 
company the  bonds,  or,  as  to  the  interest  on 
registered  bonds,  shall  be  filed  with  the  payer, 
and  such  certificates  shall  state  all  the  facts 
as  in  the  form  on  p.  219. 

That,  in  the  case  of  coupons  of  bonds  and 
interest  payable,  etc.,  to  residents  of  the  United 
States,  the  debtor  or  its  fiscal  agents  shall 
withhold  the  tax,  except  as  to  exemption 
claimed  in  the  certificate;  and  where  the  in- 
terest is  registered  the  same  form  shall  be  used 
where  exemptions  are  claimed,  except  that  it 
shall  be  filed  with  the  debtor  at  least  five  days 
before  the  due  date  of  the  interest. 

That  these  certificates  must  be  signed  as 
directed,  and  that  agents,  trustees,  etc.,  may 
sign  for  those  they  represent. 

That,  if  corporations,  etc.,  of  the  United 


210  INCOME   TAX   LAW   EXPLAINED 

States,  or  organizations,  etc.,  taxable  or  exempt, 
as  provided  in  Par.  G  (a)  of  the  act,  own  bonds, 
the  debtor  is  not  to  withhold  the  tax,  provided 
coupons,  etc.,  are  accompanied  by  a  certificate, 
as  in  the  form  on  p.  221.  And  interest  cou- 
pons, etc.,  not  accompanied  by  certificates,  the 
form  given  on  p.  223  shall  be  executed  by  the 
bank,  etc. 

That  the  debtors,  etc.,  shall  deliver  all  cer- 
tificates, etc.,  to  the  collector  for  the  district  on 
or  before  the  20th  of  the  month  succeeding  that 
in  which  the  certificates  were  received  by  them. 

That  the  tax  shall  not  be  withheld  on  coupons 
or  interest  due  before  March  1,  1913. 

That  all  parties  collecting  coupons,  checks^ 
bills  of  exchange,  etc.,  for  or  in  payment  of 
interest  on  foreign  bonds,  etc.,  and  for  dividends 
of  foreign  corporations,  etc.,  must  obtain  a 
license  from  the  Commissioner  of  Internal 
Revenue,  and  may  be  required  to  give  bond; 
that  the  licensee  shall  withhold  the  tax,  making 
indorsement  as  provided,  which  shall  be  suffi- 
cient to  relieve  subsequent  holders,  and,  if 
the  indorsement  is  impracticable,  a  statement 
bearing  the  indorsement;  that  such  licensee 
shall  file  with  the  collector  of  the  district  a  list 
of  names  and  addresses,  not  later  than  the 
20th  of  the  month  next  succeeding  the  receipt 
of  the  items;  that,  if  the  coupons,  etc.,  are  pre- 


TKEASURY   REGULATIONS  211 

sented  by  an  individual  claiming  deduction 
under  Par.  C,  Sect.  2,  of  the  act,  such  indi- 
vidual shall  have  the  deduction,  upon  signing 
on  the  form  or  coupons  payable  here;  or,  if 
such  items  are  presented  by  corporations,  etc., 
organized  here,  the  form  of  certificate  pre- 
scribed shall  be  used;  that  in  both  instances  the 
licensee  shall  retain  the  certificates  for  delivery 
with  the  lists  aforesaid  to  the  collector,  not 
later  than  the  20th  of  the  month  next  succeeding 
that  in  which  the  items  were  received,  and  shall 
attach  to  the  coupons,  etc.,  a  prescribed  state- 
ment sufficient  to  relieve  subsequent  holders; 
that  the  interest  upon  foreign  bonds,  even 
though  the  coupons  are  payable  here,  are  in- 
cluded in  those  provisions;  that  persons  licensed 
shall  keep  correct  records  open  to  the  inspection 
of  internal  revenue  officers;  that  penalties  are 
imposed  for  failure  to  comply  with  regulations 
and  for  false  statements;  that  licenses  are  good 
until  revoked;  that  application  should  be  made 
to  collectors,  and  may  be  issued  without  cost, 
upon  the  filing  of  a  bond;  that  all  applying 
shall  register  their  names  and  addresses  and 
state  their  business,  and  such  application 
with  bond,  when  approved,  shall  be  a  sufficient 
compliance  with  law  until  Feb.  1,  1914,  without 
incurring  penalties. 
That  in  the  case  of  partnerships,  the  coupons, 


212  INCOME   TAX   LAW  EXPLAINED 

etc.,  shall  be  accompanied  by  a  certificate 
signed  in  the  firm's  name  by  a  member  or  by 
each  member,  and  the  tax  shall  be  withheld 
by  the  debtor.  The  form  is  given  on  p.  231. 
Any  member  entitled  to  a  deduction  of  his  pro 
rata  share  of  the  tax  withheld  at  the  source 
may  claim  the  same  when  making  his  individual 
income  tax  return. 

That  the  tax  will  not  be  deducted  in  the  case 
of  bona  fide  owners,  citizens  of  and  residing 
in  foreign  countries,  provided  such  interest 
coupons,  etc.,  shall  be  accompanied  by  a  cer- 
tificate in  the  form  given  on  p.  234;  and  unless 
such  proof  of  foreign  ownership  is  given,  the 
tax  shall  be  deducted. 

That  on  Nov.  1,  1913,  and  for  fifteen  days 
thereafter,  coupons  need  not  be  accompanied 
by  certificates  already  described,  provided 
they  are  accompanied  by  a  temporary  certifi- 
cate in  the  form  given  on  p.  236;  that  on  or 
before  Feb.  1,  1914,  certificates  of  ownership 
of  bonds  on  which  was  collected  interest 
referred  to  in  the  temporary  certificates  may  be 
delivered  to  the  debtor,  who  may  return  any 
sum  withheld  to  which  the  owner  may  be  en- 
titled; and  any  temporary  certificates,  for 
which  certificates  of  ownership  shall  not  have 
been  substituted,  shall  by  March  1,  1914,  be 
delivered  to  the  collector. 


TREASURY   REGULATIONS  213 

That  specific  directions  are  given  as  to  size, 
etc.,  of  certificates  and  as  to  paper  to  be  used, 
and  the  parties  first  receiving  coupons,  etc., 
shall  write  or  stamp  his  or  its  name  and  address 
and  the  date  on  the  back  of  the  certificates. 

Other  regulations  will  soon  be  issued  and 
may  be  obtained  of  the  collector  of  internal 
revenue  or  of  one's  banker. 


REGULATIONS 

REGARDING  THE  DEDUCTION  OF  THE  INCOME 
TAX  AT  THE  SOURCE  ON  INTEREST  MATUR- 
ING ON  BONDS,  NOTES  AND  OTHER  SIMILAR 
OBLIGATIONS  OF  CORPORATIONS,  JOINT 
STOCK  COMPANIES  OR  ASSOCIATIONS,  AND 
INSURANCE  COMPANIES,  UNDER  THE  PRO- 
VISIONS OF  SECTION  II  OF  THE  ACT  OF 
OCTOBER  3,  1913: 

TAX  TO   BE   DEDUCTED   AT   SOURCE 

Under  the  income  tax  law,  enacted  October 
3,  1913,  a  tax  of  1  per  cent,  designated  in  the 
law  as  the  normal  tax,  shall  be  deducted  at 
"the  source,"  beginning  November  1,  1913, 
from  all  income  accruing  and  payable  to  (A) 
every  citizen  of  the  United  States,  whether  re- 
siding at  home  or  abroad,  and  to  (B)  every 
person  'residing  in  the  United  States,  though 
not  a  citizen  thereof,  which  may  be  derived 
from  interest  upon  bonds  and  mortgages,  or 
deeds  of  trust,  or  other  similar  obligations,  in- 
cluding equipment  trust  agreements  and  re- 
ceivers' certificates  of  corporations,  joint  stock 
companies  or  associations,  and  insurance  com- 


COUPONS  AND   INCOME   TAX  215 

panies,  although  such  interest  does  not  amount 
to  $3,000;  excepting  only  the  interest  upon 
the  obligations  of  the  United  States  or  its 
possessions,  or  a  State  or  any  political  sub- 
division thereof.  The  term  " Debtor,"  as 
hereinafter  used,  shall  be  construed  to  cover 
all  corporations,  joint  stock  companies  or  asso- 
ciations, and  insurance  companies. 

WHEN  TAX  SHALL  BE  WITHHELD  BY  DEBTOR 

For  the  purpose  of  collecting  this  tax  on  all 
coupons  and  registered  interest  originating  or 
payable  in  the  United  States,  the  source  shall 
be  the  debtor  (or  its  paying  agent  hi  the  United 
States)  which  shall  deduct  the  tax  when  same 
is  to  be  withheld;  and  no  other  bank,  trust 
company,  banking  firm,  or  individual  taking 
coupons  or  interest  orders  for  collection,  or 
otherwise,  shall  withhold  the  tax  thereon;  pro- 
vided that  all  such  coupons,  or  orders  for  regis- 
tered interest,  are  accompanied  by  certificates 
of  ownership  signed  by  the  owners  of  the  bonds 
upon  which  the  interest  matures.  These  cer- 
tificates shall  be  in  the  forms  hereinafter  pre- 
scribed, and  a  separate  certificate  shall  be  made 
out  by  each  owner  of  bonds  for  the  coupons  or 
interest  orders  for  each  separate  issue  of  bonds, 
or  obligations  of  each  debtor. 


216  INCOME   TAX   LAW   EXPLAINED 

WHEN  TAX  SHALL  BE  WITHHELD  BY  FIKST  COL- 
LECTING AGENCY 

If,  however,  the  coupons  or  interest  orders 
are  not  accompanied  by  certificates  as  pre- 
scribed above,  the  first  bank,  trust  company, 
banking  firm,  or  individual  or  collecting  agency 
receiving  the  coupons  or  interest  orders  for 
collection,  or  otherwise,  shall  deduct  and  with- 
hold the  tax,  and  shall  attach  to  such  coupons 
or  interest  orders  its  own  certificate,  giving 
the  name  and  address  of  the  owner  of,  or  the 
person  presenting  such  coupons  or  interest 
orders  if  the  owner  is  not  known,  with  a  de- 
scription of  the  coupons  or  interest  orders; 
also  setting  forth  the  fact,  that  they  are  with- 
holding the  tax  upon  them;  whereupon  the 
debtor  shall  not  again  withhold  the  tax  on  said 
coupons  or  interest  orders,  but  hi  lieu  thereof 
shall  deliver  to  the  Government  the  certificate 
of  such  bank,  trust  company,  etc.,  which  is 
withholding  such  tax  money. 

Any  corporation,  collecting  agency,  or  per- 
son first  receiving  from  the  owner  any  interest 
coupons  or  orders  for  the  collection  of  regis- 
tered interest,  and  to  whom  the  certificates 
above  provided  for  are  delivered,  should  re- 
quire the  persons  tendering  such  coupons  or 
orders  for  registered  interest  to  satisfactorily 
establish  their  identity. 


COUPONS   AND   INCOME   TAX  217 

PAYMENT  OF  REGISTERED  INTEREST  BY  DEBTORS 

A  debtor  whose  bonds  may  be  registered, 
both  as  to  principal  and  interest,  shall  deduct 
the  normal  tax  of  one  per  cent  from  the  ac- 
cruing interest  on  all  bonds  before  sending  out 
checks  for  said  interest  to  registered  owners 
or  before  paying  such  interest  upon  interest 
orders  signed  by  the  registered  holders  of  said 
bonds  until  there  shall  be  filed  with  said  debtor 
or  its  fiscal  agent  (and  not  later  than  thirty 
(30)  days  prior  to  March  1)  through  whom 
said  interest  is  customarily  paid,  the  proper 
certificates  claiming  exemption  from  liability 
for  said  tax  as  herein  provided,  executed  as 
follows : 

By  a  citizen  or  resident  of  the  United  States, 
the  bona  fide  owner  of  the  registered  obliga- 
tions, who  may  claim  exemption  under  Para- 
graph C,  Section  2  of  the  Federal  Income  Tax 
Law;  or 

By  corporations,  joint  stock  companies, 
associations,  or  insurance  companies  organized 
in  the  United  States,  or  organizations,  associ- 
ations, fraternities,  etc.,  which  are  either  tax- 
able or  exempt  from  taxation  as  provided  in 
Paragraph  G,  Subdivision  A,  of  the  act;  or 

By  a  bona  fide  resident  and  citizen  of  a  for- 
eign country,  claiming  exemption  as  such. 


218  INCOME   TAX   LAW   EXPLAINED 

DESIGNATION   OF   FISCAL  AGENCIES 

The  " debtor"  may  appoint  paying  or  fiscal 
agents  to  act  for  it  in  matters  pertaining  to  the 
collection  of  this  tax  upon  filing  with  the  col- 
lector of  internal  revenue  for  its  district  a 
proper  notice  of  the  appointment  of  such 
agent  or  agents. 

CERTIFICATES  CLAIMING  EXEMPTION 

If  the  owners  of  the  bonds  are  individuals 
who  are  citizens  or  residents  of  the  United 
States,  the  aforesaid  certificates  shall  accom- 
pany the  coupons,  or  with  respect  to  the  in- 
terest on  registered  bonds,  shall  be  filed  with 
payer  of  said  interest;  and  such  certificates 
shall  describe  the  bonds  and  show  the  amount 
of  coupons  attached  or  the  amount  of  interest 
due  such  owners  on  registered  bonds,  and  the 
full  name  and  address  of  the  owners;  and  shall 
also  state  whether  they  claim  or  do  not  then 
claim  exemption  from  taxation  at  the  source 
provided  for  by  Paragraph  C  of  Section  2  of  the 
Federal  Income  Tax  Law,  ($3,000)  and  under 
certain  conditions  ($4,000),  as  to  the  income 
represented  by  such  coupons  or  interest. 

The  certificate  shall  also  show  the  amount, 
if  any,  of  exemption  claimed  and  the  date  of 
signature. 


COUPONS  AND   INCOME   TAX  219 

The  form  of  certificate  to  be  used  for  this 
purpose  shall  be  substantially  as  follows: 

FORM  OF  CERTIFICATE  TO  BE  PRESENTED  WITH 
COUPONS  OR  INTEREST  ORDERS  STATING 
WHETHER  OR  NOT  EXEMPTION  IS  CLAIMED 
UNDER  PARAGRAPH  C,  SECTION  2,  OF  THE 
FEDERAL  INCOME  TAX  LAW 

I  do  solemnly  declare  that  I, 

a  citizen  or  resident  of  the  United  States  and 

residing    at ,  am    the    owner    of 

$ bonds  of  the  denominations  of 

$ each,  Nos ,  of  the 

(give  name  of  debtor,)  known  as 

bonds,  (de- 
scribe the  particular  issue  of  bonds,)  from  which 
were  detached  the  accompanying  coupons,  due 

191 . . ,  amounting  to  $ 

or  upon  which  there  matured 

191 . . ,  $ of  registered  interest. 

I  (do. . . .),  (do  not)  now  claim,  with  respect 
to  the  income  represented  by  said  interest  the 

benefit  of  a  deduction  of  $ allowed 

under  Paragraph  C,  Section  II,  of  the  Federal 
Income  Tax  Law. 

Name    

Address 

Date ,  191.. 


220  INCOME   TAX   LAW   EXPLAINED 

Whenever  interest  coupons  accompanied  by 
a  certificate  of  an  individual  who  is  a  citizen  or 
resident  of  the  United  States,  as  aforesaid,  are 
presented  to  a  debtor  or  its  fiscal  agent  for 
payment,  or  whenever  interest  is  payable  to 
such  individual  on  a  bond  registered  as  to  both 
principal  and  interest,  the  debtor  or  its  fiscal 
agents  shall  deduct  and  withhold  the  amount 
of  the  normal  tax,  except  to  the  extent  that 
exemption  is  claimed  in  the  certificate  of 
ownership  in  the  form  herein  prescribed. 

Where  the  interest  to  be  paid  is  registered, 
the  same  form  of  certificate  shall  be  used  where 
exemptions  are  claimed,  except  that  it  shall 
be  filed  with  the  debtor  at  least  five  (5)  days 
before  the  due  date  of  such  interest. 


BY  WHOM  SIGNED 

These  certificates  must  be  signed  by  the 
claimants,  with  their  full  name,  and  contain 
theu-  Post  Office  and  street  address,  also  the 
date  when  signed. 

Duly  authorized  agents,  trustees  acting  in  a 
trust  capacity,  etc.,  may  sign  such  certificates 
for  the  persons  for  whom  they  act. 


COUPONS  AND  INCOME  TAX  221 

ORGANIZATIONS  WHOSE  INTEREST  COUPONS  ARE 
NOT  TAXED   AT  SOURCE 

If  the  owners  of  the  bonds  are  corporations, 
joint  stock  companies,  associations,  or  insur- 
ance companies  organized  in  the  United  States, 
no  matter  how  created  or  organized,  or  or- 
ganizations, associations,  fraternities,  etc., 
which  are  either  taxable  or  exempt  from  taxa- 
tion as  provided  in  Paragraph  G,  Sub-division 
A,  of  the  Act,  the  debtor  is  not  required  to 
withhold  or  deduct  the  tax  upon  income  de- 
rived from  interest  on  such  bonds,  provided 
coupons  or  orders  for  interest  from  such  bonds 
shall  be  accompanied  by  a  certificate  of  the 
owners  thereof  certifying  to  such  ownership, 
which  certificates  shall  be  filed  with  the  debtor 
when  such  coupons  or  interest  orders  are  pre- 
sented for  payment. 

Such  certificates  shall  be  substantially  in  the 
following  form: 

CERTIFICATES  TO  BE  FURNISHED  BY  ORGANIZA- 
TIONS NOT  SUBJECT  TO  TAX  ON  INTEREST 
AT  SOURCE 

I 

(give  name) 

the of  the 

(give  official  position)       (name  of  organization) 


222  INCOME   TAX   LAW  EXPLAINED 

a of 

(character   of  organization)             (State) 
located  at 

(post  office  address) 
do  solemnly  declare  that  said 

(give  name  of  organization) 

is  the  owner  of  $ bonds  of 

the  denomination  of  $ each,  Nos. 


of  the 

(give  name  of  debtor) 

known  as bonds, 

(describe  particular  issue  of  bonds) 
from  which  were  detached  the  accompanying 

coupons,  due ,  191 . . ,  amounting 

to  $ ,  or  upon  which  there  matured 

,  191..,  $ of  regis- 
tered interest,  and  that  under  the  provisions  of 
the  income  tax  law  of  October  3,  1913,  said  in- 
terest is  exempt  from  the  payment  of  taxes 
collectible  at  the  source,  which  exemption  is 
hereby  claimed. 

Name 

(official  position) 

of 

(name  of  organization) 

Date ,  191. . .     Address 

(post  office) 


COUPONS  AND   INCOME   TAX  223 

This  certificate  must  be  signed  by  the  full 
name  of  the  organization,  stating  its  place  of 
business,  and  by  the  President,  Secretary  or 
some  other  principal  officer  of  the  said  corpora- 
tion, or  organization  duly  authorized  to  sign 
same,  together  with  the  date  of  execution. 

HOW   COLLECTED   WHEN    NOT   ACCOMPANIED   BY 
THE   CERTIFICATE   OF  OWNER 

Where  coupons  or  interest  orders  are  not 
accompanied  by  the  ownership  certificates  the 
form  to  be  executed  by  the  first  bank,  trust 
company,  banking  firm,  individual  or  collec- 
tion agency  receiving  the  same  for  collection  or 
otherwise  which  must  accompany  the  coupons  or 
interest  orders  shall  be  substantially  as  follows: 

FORM  OF  CERTIFICATE  TO  BE  PRESENTED  WITH 
COUPONS  OR  INTEREST  ORDERS  WHEN  NOT 
ACCOMPANIED  BY  CERTIFICATE  OF  OWNER 

I, ,  the 

(name)  (official  position) 

of  the 

(bank  or  collecting  agency) 

of 

(address) 

do  solemnly  declare  that  said 

(bank  or  collecting  agency) 


224  INCOME  TAX  LAW  EXPLAINED 

has  (or  have)  purchased  or  accepted  for  collec- 
tion  the   accompanying   coupons   or   interest 

orders,  amounting  to  $ ,  and 

which  represent  interest  matured  on  $ 

of  bonds  of  the   

(name  of  debtor) 

and  that received 

(bank  or  collecting  agency) 
said  coupons  or  orders  for  registered  interest 

from 

(name  of  party  from  whom  received) 

of ,  and  that  no 

(address  of  said  party) 

certificate  of  ownership  accompanied  said  cou- 
pons or  interest  orders,  and    

(bank  or  collecting  agency) 
hereby  acknowledges  responsibility  of  with- 
holding therefrom  the  normal  income  tax  of 
1%,  in  accordance  with  the  regulations  of  the 
Treasury  Department. 

Name   

(bank  or  collecting  agency) 

By 

(Signature  of  officer  duly  authorized 
to  sign  and  his  official  position) 

Address 

(give  full  address) 
Date ,  19... 


COUPONS  AND  INCOME  TAX      225 

This  certificate  shall  be  dated  and  signed  by 
and  shall  state  the  address  of  the  corporation, 
organization,  collecting  agency  or  person  with- 
holding the  tax,  with  full  name  and  address. 


FINAL   DISPOSITION   OF   CERTIFICATES 

The  debtor  or  paying  agents  shall  deliver  all 
certificates  with  the  list  of  names  and  addresses 
of  those  for  whom  the  tax  has  been  withheld, 
showing  amounts,  as  required  by  law,  to  the 
Collector  of  Internal  Revenue  for  their  district 
on  or  before  the  20th  day  of  the  month  succeed- 
ing that  in  which  said  certificates  were  received 
by  them. 

INTEREST  DUE  BEFORE  MARCH   .1,  F1913. 

The  tax  shall  not  be  withheld  on  coupons  or 
registered  interest  maturing  and  payable  be- 
fore March  1,  1913,  although  presented  for 
payment  at  a  later  date. 

LICENSE  REQUIRED  FOR  COLLECTION  OF  INCOME 
FROM   FOREIGN   COUNTRIES 

All  persons,  firms,  or  corporations  undertak- 
ing for  accommodation  or  profit  (this  includes 
handling  either  by  way  of  purchase  or  collec- 


INCOME   TAX   LAW   EXPLAINED 

tion)  the  collection  of  coupons,  checks,  bills  of 
exchange,  etc.,  for,  or  in  payment  of  interest 
upon  bonds  issued  in  foreign  countries  and 
upon  foreign  mortgages,  or  like  obligations, 
and  for  any  dividends  upon  stock  or  interest 
upon  obligations  of  foreign  corporations,  asso- 
ciations or  insurance  companies  engaged  in 
business  in  foreign  countries,  are  required  by 
law  to  obtain  a  license  from  the  Commissioner 
of  Internal  Revenue  and  may  be  required  to 
give  bond  hi  such  amount  and  under  such 
conditions  as  the  Commissioner  of  Internal 
Revenue  may  prescribe. 


BY  WHOM  TAX  IS  WITHHELD 

The  licensed  person,  firm,  or  corporation  first 
receiving  any  such  foreign  items,  for  collection 
or  otherwise,  shall  withhold  therefrom  the 
normal  tax  of  1  per  cent  and  will  be  held  re- 
sponsible therefor.  He  (the  licensee)  shall 
thereupon  indorse  or  stamp  thereon  the  words 
"income  tax  withheld  by  '  (giving 

his  or  their  name,  address,  and  date),  which 
shall  be  sufficient  evidence  to  relieve  subse- 
quent holders  or  purchasers  from  the  duty  of 
also  withholding  the  income  tax. 

If  the  size  or  nature  of  such  coupons,  checks, 
etc.,  make  it  impracticable  to  make  said  in- 


COUPONS  AND   INCOME   TAX  227 

dorsement  as  above,  a  statement  identifying 
the  item  on  which  tax  is  withheld  and  bearing 
said  indorsement  may  be  attached  thereto  with 
the  same  effect  as  if  the  indorsement  was  made 
directly  thereon. 

LIST   OF   TAX    COLLECTIONS    ON    FOEEIGN    ITEMS 

Such  licensee  shall  obtain  the  names  and  ad- 
dresses of  the  persons  from  whom  such  items 
are  received  and  shall  prepare  a  list  of  same  and 
file  it  with  the  collector  of  internal  revenue 
for  his  district  not  later  than  the  20th  of  the 
month  next  succeeding  the  receipt  of  such 
items.  The  list  shall  be  dated  and  shall  con- 
tain the  names  and  addresses  of  the  taxable 
persons  and  the  amount  of  tax  deducted  and 
from  what  source  collected. 

CERTIFICATES    TO    SECURE    TAX    EXEMPTION    ON 
FOREIGN   ITEMS 

In  the  event  such  coupons,  checks,  or  bills 
of  exchange  above  mentioned  are  presented  for 
collection  by  an  individual  claiming  the  benefit 
of  the  deductions  allowable  under  Paragraph 
C,  Section  II,  of  the  Federal  income  tax  law, 
such  individual  shall  be  permitted  to  avail 
himself  of  the  deduction  claimed,  upon  sign- 


228  INCOME   TAX   LAW   EXPLAINED 

ing  on  the  form  heretofore  prescribed  for  cou- 
pons payable  in  the  United  States,  and  no  tax 
shall  be  deducted  for  the  amount  of  the  ex- 
emption so  claimed;  or  if  such  items  are  pre- 
sented by  corporations,  joint  stock  companies, 
or  associations  and  insurance  companies  or- 
ganized in  the  United  States,  the  form  of  cer- 
tificate heretofore  prescribed  for  such  organiza- 
tions shall  be  used,  and  in  such  instances  no 
tax  shall  be  deducted. 

In  both  instances  the  licensee  first  receiving 
such  items  shall  retain  such  certificates  for  de- 
livery with  the  lists  aforesaid  to  the  collector 
of  internal  revenue  for  his  district  not  later 
than  the  20th  of  the  month  next  succeeding 
that  in  which  said  items  were  received,  and 
with  respect  to  said  coupons,  checks  or  bills 
of  exchange,  said  licensee  shall  attach  thereto 
(identifying  the  items)  or  indorse,  or  stamp 
thereon  the  words  "  Income  tax  exemption 
claimed  through  "  (giving  name  and 

address  of  licensee),  which  shall  be  sufficient 
evidence  to  relieve  subsequent  holders  or  pur- 
chasers from  the  duty  of  also  withholding  the 
tax  thereon. 

The  provisions  for  collection  of  the  tax  on 
foreign  obligations  set  forth  in  this  section  of 
the  regulations  includes  the  interest  upon  all 
foreign  bonds,  even  though  the  coupons  may 


COUPONS   AND   INCOME   TAX  229 

be  at  the  option  of  the  holder,  payable  in  the 
United  States,  as  well  as  in  some  foreign 
country. 

ACCURATE    RECORD   TO    BE    KEPT   BY  LICENSEES 

All  persons  licensed  shall  keep  then*  records 
in  such  manner  as  to  show  from  whom  every 
such  item  has  been  received,  and  such  records 
shall  be  open  at  all  times  to  the  inspection  of 
internal  revenue  officers. 

PENALTY   FOR   OMISSION   TO   OBTAIN   LICENSE 

Failure  to  obtain  license  or  to  comply  with 
regulations  is  punishable  by  a  fine  not  exceed- 
ing $5,000  or  imprisonment  not  exceeding  one 
year,  or  both,  in  the  discretion  of  the  court. 
Such  licenses  shall  continue  in  force  until 
revoked. 

Application  for  such  licenses  should  be  made 
to  the  collectors  of  internal  revenue  for  the 
district  in  which  they  are  engaged  in  business 
and  may  be  issued  without  cost  to  such  persons 
as  the  commissioner  may  approve,  upon  their 
filing  with  the  collector  the  bond  herein  pro- 
vided for. 

All  persons  in  making  application  to  the  col- 
lector of  internal  revenue  for  such  licenses  shall 


230  INCOME  TAX  LAW  EXPLAINED 

register  their  names  and  addresses  and  state 
the  nature  of  the  business  in  which  they  are 
engaged.  Such  application  for  the  license, 
accompanied  by  a  proper  surety  bond,  when 
both  have  been  approved  by  the  collector  will 
be  considered  a  sufficient  compliance  with  the 
law  to  enable  the  persons  making  applica- 
tion to  do  business  until  February  1,  1914, 
without  incurring  the  penalties  provided  by 
law  for  failure  to  procure  the  required  license. 

PENALTY  FOR  FALSE  STATEMENTS 

//  any  person  for  the  purpose  of  obtaining 
any  allowance  or  reduction  by  virtue  of  a  claim 
for  exemption,  either  for  himself  or  for  any  other, 
knowingly  makes  a  false  statement  or  false  or 
fraudulent  representation,  he  is  liable  under  the 
act  to  severe  penalties. 

PARTNERSHIPS 

Where  coupons  or  interest  orders  presented 
for  payment  represent  the  interest  on  bonds 
or  other  similar  obligations  owned  by  a  partner- 
ship, they  shall  be  accompanied  by  a  certifi- 
cate of  ownership,  which  shall  be  signed  either 
in  the  firm's  name  by  one  member  of  the  firm 
or  by  each  individual  member  of  the  partner- 


COUPONS  AND  INCOME  TAX      231 

ship,  and  the  normal  tax  shall  be  withheld  by 
the  debtor  with  respect  to  the  income  repre- 
sented by  said  interest. 

Said  certificate  of  ownership  shall  be  in 
substantially  the  following  form: 

FOKM   OF   CERTIFICATE   TO   BE   FILLED   OUT  AND 
SIGNED   BY  MEMBERS   OF   PARTNERSHIPS 

The  following  certificate  should  be  used  when 
coupons  or  interest  orders  are  presented  by 
citizens  or  residents  of  the  United  States  for 
collection  of  interest  on  bonds  or  other  similar 
obligations  owned  by  the  partnerships  of  which 
they  are  members. 

I, ,  a  member  of  the 

firm   or   partnership   of 

of and  residing  at 

(give  full  address) 

do  solemnly  declare  that  the  said  partnership 
is  the  owner  of  $ bonds  of  the  de- 
nomination of  $ each,  Nos 


of  the (give  name  of  debtor) 

known  as bonds,  from 

(describe  the  particular  issue  of  bonds) 

which  were   detached  the   accompanying  in- 


232  INCOME   TAX   LAW  EXPLAINED 

terest    coupons    due 191 . . , 

amounting  to  $ ,  or  upon  which  there 

matured 191 . . 

$ of  registered  interest,  and  that  the 

name  and  address  of  said  firm  or  partnership 
and  the  names  of  the  individual  members 
thereof,  and  their  places  of  residence,  are  as 
follows : 

(Names  of  partners)  (Address) 


of  firm  of 

(Name  of  partner  signing) 

(Address) 

Date 191.. 

Any  member  of  a  partnership  who  is  entitled 
to  a  deduction  (under  Paragraph  C,  Section  II, 
of  the  income  tax  law)  of  his  pro  rata  share  of 
the  tax  which  may  be  withheld  at  the  source 
on  interest  on  bonds  owned  by  his  co-partner- 
ship, as  above,  may  claim  such  deduction  or 
allowance  when  he  shall  make  his  individual 
income  tax  return  for  the  year  in  which  said 
deduction  at  the  source  was  made. 


COUPONS  AND   INCOME   TAX  233 

NON-RESIDENT  FOREIGNERS  OWNING  INTEREST 
BEARING  BONDS  NOT  SUBJECT  TO  TAXATION 
ON  INCOME  FROM  SUCH  BONDS  IF  PROPER 
CERTIFICATE  FURNISHED 

This  tax  will  not  be  deducted  from  the  in- 
come which  may  be  derived  from  interest  on 
bonds,  mortgages,  equipment  trusts,  receivers' 
certificates,  or  other  similar  obligations  of 
which  the  bona  fide  owners  are  citizens  of 
foreign  countries  residing  in  foreign  countries, 
provided  that  such  interest  coupons,  or,  hi  case 
of  wholly  registered  bonds,  the  orders  for  the 
payment  of  such  interest  shall  be  accompanied 
by  duly  certified  certificates  hereinafter  pro- 
vided for  to  cover  the  cases  of  foreign  and  non- 
resident owners  of  bonds  and  other  securities. 
Unless  such  proof  of  foreign  ownership  is  duly 
furnished,  the  normal  tax  of  1  per  cent  shall 
be  deducted  as  herein  provided. 

Such  certificate  shall  be  in  substantially  the 
following  form: 


234  INCOME  TAX  LAW  EXPLAINED 

FOUM  OF  CERTIFICATE  TO  BE  PRESENTED  WITH 
COUPONS  OR  INTEREST  ORDERS,  DETACHED 
FROM  BONDS  OR  OTHER  OBLIGATIONS  OWNED 
BY  THOSE  WHO  ARE  BOTH  CITIZENS  OR 
SUBJECTS,  AND  RESIDENTS  OF  FOREIGN 
COUNTRIES 

I  do  solemnly  declare  that  I  am  not  a  citizen 
or  resident  of  the  United  States  of  America, 

but  a  subject  (or  citizen)  of 

and  that  I  am  the  owner  of  $ 

bonds  of  the  denomination  of  $ each, 

Nos 

of  the 

(Give  name  of  debtor  corporation) 
known  as bonds 

(Describe  the  particular  issue  of  bonds) 
from  which  were  detached  the  accompanying 

coupons,  due ,  191 . . ,  amounting  to 

$ ,  or   upon  which  there   matured 

,191..,$ 

of  registered  interest,  and  that  being  a  non- 
resident foreigner,  I  am  exempt  from  the  in- 
come tax  imposed  on  such  interest  by  the 
United  States  Government  under  the  law 
enacted  October  3,  1913,  and  that  no  citizen 
of  the  United  States  wherever  residing  or 


COUPONS  AND   INCOME   TAX  235 

foreigner  residing  in  the  United  States,  or 
any  of  its  possessions,  has  any  interest  in 
said  bonds,  coupons  or  interest. 

(Signature  of  owner  of  bonds.    Give  full  name) 

Date ,191.. 

Address 

(Give  full  post  office  address) 

TEMPORARY  PROVISION 

In  view  of  the  fact  that  the  tune  required 
for  the  interpretation  of  the  law  and  prepara- 
tion and  issuance  of  these  regulations  brings 
the  date  so  near  November  1  and  that  many 
coupons  payable  upon  that  date  are  already 
in  transit  without  the  prescribed  certificates 
attached,  with  a  desire  to  cause  as  small  an 
amount  of  inconvenience  as  possible  to  bond- 
holders and  general  business  as  may  be  com- 
patible with  the  provisions  of  the  law  and 
of  these  regulations,  the  following  temporary 
provision  is  made: 

On  November  1,  1913,  and  for  fifteen  days 
thereafter,  coupons  presented  to  a  debtor  need 
not  be  accompanied  by  certificates  in  any  of 
the  forms  hereinbefore  described,  provided 
that  such  coupons  are  accompanied  by  a  cer- 
tificate substantially  in  the  folio  whig  form: 


236  INCOME   TAX   LAW   EXPLAINED 

FORM  OF  TEMPORARY  CERTIFICATES,  WHICH  MAY 
BE    USED    ONLY    PRIOR    TO    NOVEMBER      16, 
1913,   SUBJECT  TO   SUBSTITUTION 

I  (we)  hereby  certify  that  I  am  (we  are) 
lawfully  entitled  to  present  for  payment  the 
accompanying  coupons  or  interest  orders 

amounting    to    $ (giving    amount), 

representing  interest  matured  on  the  follow- 
ing bonds 

(giving  name  of  debtor  and  designating  the 
description,  style,  and  numbers  of  the  bonds); 
that  said  coupons  or  interest  orders  came  into 
my  (our)  possession  unaccompanied  by  a  cer- 
tificate of  ownership  of  said  bonds,  in  any  of 
the  forms  required  by  the  regulations  of  the 
United  States  Treasury  Department,  and  that 
the  name  and  address  of  the  owner  of  such 
bonds  are  as  follows:  (give  name  and  address 


of  owner;  if  impossible  to  do  this,  so  state.) 
Name  of  person,  firm,  or  corporation  present- 
ing coupons 

Address 

On  or  before  February  1,  1914,  certificates 
of  the  ownership  of  any  of  the  bonds  upon 
which  was  collected  the  interest  referred  to  in 


COUPONS  AND  INCOME  TAX  237 

such  temporary  certificates,  in  any  of  the  forms 
above  set  forth,  may  be  delivered  to  the  debtor, 
and  said  debtor  may  thereupon  return  any  sum 
withheld  to  which  the  owner  of  such  bonds  may 
be  entitled  under  the  law  and  regulations  upon 
the  facts  disclosed  by  such  ownership  certifi- 
cates. Any  temporary  certificates  relating  to 
bonds,  for  which  certificates  of  ownership  shall 
not  have  been  substituted  with  the  debtor 
shall,  on  or  before  March  1,  1914,  be  delivered 
to  the  collector  of  internal  revenue. 

All  forms  of  certificates  herein  provided  for 
shall  be  8  inches  wide  and  3^  inches  from  top 
to  bottom,  and  printed  on  paper  corresponding 
in  weight  and  texture  to  glazed  bond  paper  17 
by  28,  about  26  pounds  to  the  ream  of  500 
sheets,  or  white  writing  paper  21  by  32,  about 
32  pounds  to  the  ream  of  500  sheets,  and  the 
person  or  corporation  first  receiving  coupons 
or  interest  orders  for  collection  shall  write  or 
stamp  his  or  its  name  and  address  and  date 
on  the  back  of  said  certificates. 

W.  H.  OSBORN, 
Commissioner  of  Internal  Revenue. 

Approved  October  25,  1913. 

W.  G.  McADOO, 
Secretary  of  the  Treasury. 


238  INCOME   TAX   LAW   EXPLAINED 

FURTHER  REGULATIONS  AS  TO  COLLECTION 
AT  THE  SOURCE 

REGULATIONS 

REGARDING  THE  DEDUCTION  AT  THE  SOURCE  OF 
THE  NORMAL  TAX  OF  1  PER  CENT.  FROM 
INCOME  OF  INDIVIDUALS  OTHER  THAN  IN- 
COME DERIVED  FROM  INTEREST  UPON  BONDS 
AND  MORTGAGES,  OR  DEEDS  OF  TRUST  OR 
OTHER  SIMILAR  OBLIGATIONS  OF  CORPORA- 
TIONS, JOINT  STOCK  COMPANIES  OR  ASSOCIA- 
TIONS, AND  INSURANCE  COMPANIES  UNDER 
THE  PROVISIONS  OF  SECTION  2  OF  THE  ACT 
OF  OCTOBER  3,  1913 

"The  source,"  in  these  regulations,  shall  be 
construed  as  referring  to  the  place  where  the 
income  originates. 

BY  WHOM  THE  NORMAL  TAX  SHALL  BE  DEDUCTED 
AND   WITHHELD 

All  persons,  firms,  &c.,  mentioned  in  Para- 
graph E  of  this  law  hereinafter  referred  to  as 
"Withholding  Agents/'  namely: 

"Copartnerships,  companies,  corporations, 
joint  stock  companies  or  associations,  insurance 
companies,  in  whatever  capacity  acting,  in- 


KEGULATIONS  239 

eluding  lessees,  mortgagors  of  real  or  personal 
property,  trustees  acting  in  any  trust  capacity, 
executors,  administrators,  agents,  receivers, 
conservators,  employers  and  all  officers  and 
employees  of  the  United  States  having  the 
control,  receipt,  custody,  disposal  or  payment 
of  interest  (except  income  derived  from  interest 
upon  bonds  and  mortgages  or  deeds  of  trust  or 
other  similar  obligations  of  corporations,  upon 
which  the  normal  tax  of  1  per  cent,  has  been 
otherwise  withheld  at  the  source,  as  provided  by 
these  regulations),  rent,  salaries,  wages,  royal- 
ties, taxable  annuities,  emoluments  or  other 
fixed  or  determinable  gains,  profits  and  income 
of  another  person  exceeding  $3,000  for  any 
taxable  year,  except  as  hereinafter  provided." 

Shall  deduct  and  withhold  from  such  annual 
gains,  profits  and  income  such  sum  as  will  be 
sufficient  to  pay  the  normal  tax  of  1  per  cent, 
imposed  thereon  by  section  2  of  this  act,  and 
shall  make  the  lawful  return  and  pay  the  taxes 
so  withheld  to  the  collector  of  internal  revenue 
for  the  district  hi  which  said  withholding  agent 
resides  or  has  his,  her  or  its  principal  place  of 
business. 

The  normal  tax  of  1  per  cent,  shall  be  thus 
withheld  from  all  income  derived  from  fixed 
annual  periodical  rent  of  realty  or  personalty, 
interest  (except  as  herein  otherwise  provided), 


240  INCOME   TAX   LAW   EXPLAINED 

salaries,  royalties,  taxable  annuities  and  other 
fixed  annual  periodical  income  exceeding  $3,000. 


ITEMS  UPON  WHICH  TAX  IS  NOT  TO  BE  WITH- 
HELD AT  THE  SOURCE 

1.  Dividends  on  capital  stock,  or  from  the 
net  earnings  of  corporations  and  joint  stock 
companies  or  associations  and  insurance  com- 
panies, subject  to  like  tax,  when  said  with- 
holding agents  are  required  to  make  and  render 
a  return  in  behalf  of   another,   as  provided 
herein,  to  the  collector  of  his,  her  or  its  district. 

2.  Proceeds  of  life  insurance  policies  paid 
upon  the  death  of  the  person  insured  or  pay- 
ments made  by  or  credited  to  the  insured  on  life 
insurance,   endowment   or  annuity   contracts, 
upon  the  return  thereof  to  the  insured  at  the 
maturity  of  the  term  mentioned  in  the  contract, 
or  upon   the   surrender   of   contract  —  all   of 
which  shall  not  be  included  as  income  under 
this  law  —  but  this  shall  not  be  construed  to 
exempt  said  insurance  companies  from  with- 
holding and  paying  the  normal  tax  of  1  per 
cent,  on  interest  paid  by  insurance  companies 
to  beneficiaries  of  policies  when  said  interest 
exceeds  $3,000. 

3.  Income  of  an  individual  which  is  not  fixed 
or  certain  and  payable  at  stated  periods,  or  is 


REGULATIONS  241 

indefinite  or  irregular  as  to  amount  or  time  of 
accrual,  shall  not  be  withheld  at  the  source, 
but  shall  be  returned  and  the  tax  shall  be  paid 
thereon  by  the  individual. 

Income  derived  from  the  following  profes- 
sions and  vocations  come  under  this  head: 

Farmers,  merchants,  agents  compensated  on 
the  commission  basis,  lawyers,  doctors,  authors, 
inventors  and  other  professional  persons. 

Such  persons  shall  make  personal  return  of 
all  their  income,  provided  their  total  income 
from  all  sources  exceeds  $3,000. 

For  example:  When  a  lawyer  receives  a  re- 
tainer of  $5,000  as  a  special  fee,  a  deduction 
therefrom  shall  not  be  made  by  the  payer,  but 
when  a  lawyer  receives  a  retainer  of  $5,000  per 
annum  and  the  exemption  claimed  is  $3,000, 
$2,000  of  such  income  would  be  taxed  and  the 
tax  retained  at  the  source,  or  if  his  exemption 
claimed  should  be  $4,000,  $1,000  of  such  in- 
come would  be  taxed  and  the  tax  withheld  at 
the  source. 

4.  The  value  of  property  acquired  by  gift, 
bequest,  devise  or  descent. 

5.  Interest  upon  the  obligation  of  a  State  or 
any  political  subdivision  thereof,  and  upon  the 
obligations  of  the  United  States  or  its  posses- 
sions; also  the  compensation  of  the  present 
President  of  the  United  States  during  the  term 


242  INCOME   TAX   LAW  EXPLAINED 

for  which  he  has  been  elected,  and  of  the  judges 
of  the  Supreme  and  inferior  courts  of  the 
United  States  now  in  office,  and  the  compen- 
sation of  all  officers  and  employees  of  a  State 
or  any  political  subdivision  thereof  paid  by  a 
State  or  any  political  subdivision  thereof,  ex- 
cept when  such  compensation  is  paid  by  the 
United  States  Government. 

This  exempts  from  the  income  tax  all  salaries 
paid  to  an  individual  by  a  State  or  any  political 
subdivision  thereof;  this  would  include  salaries 
of  State,  county  and  municipal  officers,  in- 
cluding the  salaries  of  public  school  teachers 
and  special  compensation  paid  by  States  or 
subdivisions  thereof  for  professional  services, 
whether  in  the  shape  of  salaries  or  special  fees. 


NORMAL  TAX  ON  THE  SAME  INCOME  TO  BE  WITH- 
HELD  BUT  ONCE 

The  normal  tax  of  1  per  cent,  shall  be  deducted 
and  withheld  at  the  source  and  payment  made 
to  the  collector  of  internal  revenue,  as  pro- 
vided hi  the  law,  by  the  debtor  or  his,  her  or 
its  duly  appointed  agent  authorized  to  make 
such  deduction  and  payment. 

No  other  person,  firm  or  organization  in 
whatever  capacity  acting,  having  the  receipt, 
custody  or  disposal  of  any  income  as  herein 


REGULATIONS  243 

provided,  shall  be  required  to  again  deduct 
and  withhold  the  normal  tax  of  1  per  cent, 
thereon,  provided  that  any  person,  firm  or 
organization,  hi  whatever  capacity  acting, 
other  than  the  debtor  who  has  withheld  said 
tax,  shall  file  with  the  collector  of  internal 
revenue  for  his,  her  or  its  district,  a  certificate 
hi  substantially  the  folio  whig  form; 

FORM  OF  CERTIFICATE  TO  BE  FILED  BY  PER- 
SONS, FIRMS  OR  ORGANIZATIONS,  REQUIRED 
TO  WITHHOLD  AND  PAY  SAID  TAX,  OTHER 
THAN  THE  DEBTOR  AT  THE  SOURCE 


To 

(name  of  collector  of  internal  revenue) 

(give  address  and  district) 

I 

(name)  (official  title  if  any) 

of  the 

(person,  firm  or  organization) 

(capacity  hi  which  acting) 

of do  solemnly  declare 

(post  office  address) 

that  I  (we)  received  of , 

(name  of  person  withholding) 
same  being  income  derived  from 


244  INCOME   TAX  LAW  EXPLAINED 


(state  source,  whether  rents,  salary  or  other 
sources) 

belonging  to 

(give  name  of  person  to  whom  income  is  due) 

(address) 

and  that  the  tax  amounting  to  $ to 

which  said  person  is  subject,  has  been  withheld 

at  the  source  of  said  income  by 

(name  of  person  withholding) 

(post  office  address) 

(Signed) 

(Address) 

(street  and  number) 

(City  and  State) 
Date ,  191.. 

EXEMPTIONS    WHICH    MAY    BE    CLAIMED    BY    IN- 
DIVIDUALS 

Any  person,  subject  to  the  normal  tax  of  1 
per  cent.,  the  amount  of  which  is  withheld  or  is 
to  be  withheld  at  the  source,  wishing  to  avail 
himself  or  herself  of  the  exemption  provided  in 
paragraph  C,  section  2,  of  this  act  ($3,000  or 
$4,000  as  the  case  may  be)  must  file  with  the 


REGULATIONS  245 

withholding  agent  not  less  than  thirty  days 
prior  to  the  day  on  which  the  return  on  his  in- 
come is  due,  a  notice  in  the  following  form: 

FORM  FOR  CLAIMING  EXEMPTION  AT  THE  SOURCE 
AS  PROVIDED  IN  PARAGRAPH  C,  SECTION  2, 
OF  THE  LAW  OF  OCTOBER  3,  1913 


To 

(give  name  of  withholding  agent) 

(post  office  address) 

I  hereby  serve  you  with  notice  that  I  am 
single  (married)  and  living  with  my  wife  (hus- 
band) (strike  out  to  show  status  correctly)  and 
now  claim  the  benefit  of  the  exemption  of  $ .... 
as  allowed  in  paragraph  C  and  D  of  section  2 
of  the  Federal  income  tax  law  of  October  3, 
1913.  (My  total  exemption  under  said  para- 
graphs being  $ ) 

(Signed) 

(Address) 

(street  and  number) 

(City  and  State) 
Date ,  191.. 


246  INCOME   TAX   LAW  EXPLAINED 

BY   WHOM   EXEMPTIONS    UNDER    PARAGRAPH    C, 
SECTION  2,  OF  THIS  ACT  MAY  BE  CLAIMED 

Every  single  person,  or  every  married  person 
not  living  with  wife  or  husband,  who  is  liable 
for  the  normal  income  tax  under  this  law  may 
claim  a  total  deduction  of  $3,000  from  net  in- 
come, on  which  deduction  he  or  she  is  exempt 
from  normal  tax  of  1  per  cent. 

Where  a  husband  and  a  wife  live  together 
and  only  one  of  them  has  an  annual  income 
liable  for  the  normal  tax  of  1  per  cent.,  then  the 
husband  or  wife  who  has  the  income  shall  make 
the  return  and  pay  the  said  tax  and  may  claim 
and  deduct  an  exemption  of  $4,000. 

But  if  a  husband  and  wife  live  together  and 
each  has  an  annual  income  liable  for  the  normal 
tax  of  1  per  cent.,  then  in  that  event  they  shall 
make  a  separate  return  and  the  $4,000  exemp- 
tion allowed  to  a  husband  and  a  wife  when 
living  together  may  be  claimed  and  deducted 
by  either  the  husband  or  wife  as  they  may 
mutually  agree  (but  not  by  both  separately 
or  the  said  exemption  shall  be  prorated  between 
them  in  proportion  to  their  net  income). 


REGULATIONS  247 

AMOUNT  OF  EXEMPTION  ALLOWABLE  FOR  1913 
UNDER  PARAGRAPH  C,  SECTION  2,  OF  THE 
FEDERAL  INCOME  TAX  LAW 

For  the  present  year  of  1913  (from  March  1 
to  December  31)  exemptions  allowed  under 
paragraph  C  of  this  law  will  be  five-sixths  of 
those  of  the  calendar  year,  as  specified  in  para- 
graph D,  namely,  $2,500  if  the  exemption  is 
$3,000,  or  $3,333.33  if  the  exemption  is  $4,000, 
as  the  case  may  be. 

WHEN  AND  ON  WHAT  AMOUNT  THE  NORMAL  TAX 
OF  1  PER  CENT.  SHALL  BE  WITHHELD 

A  withholding  agent  who  pays  monthly  or 
periodically  during  the  year  interest  (except 
income  derived  from  interest  upon  bonds  and 
mortgages,  or  deeds  of  trust,  or  other  similar 
obligations  of  corporations,  &c.,  upon  which 
the  normal  tax  of  1  per  cent,  has  been  withheld 
at  the  source,  as  provided  by  these  regulations), 
rents,  salaries,  wages,  &c.,  shall  not  withhold  the 
said  tax  until  such  tune  as  the  rents,  salary, 
wages,  &c.,  shall  have  reached  an  aggregate 
amount  in  excess  of  $3,000  for  said  period. 
When  such  amount  has  been  reached,  he,  she 
or  it  shall  withhold  the  tax  on  the  whole  $3,000 
and  excess  thereof,  unless  the  person  to  whom 
the  income  is  due  files  with  him,  her  or  it  the 


248  INCOME   TAX   LAW   EXPLAINED 

notice  herein  provided,  claiming  exemption 
under  paragraph  C  of  section  2  of  this  act,  hi 
which  case  the  withholding  agent  shall  with- 
hold only  the  tax  on  the  income  in  excess  of 
said  exemption  of  $3,000  or  $4,000  (as  the  case 
may  be)  and  the  tax  so  withheld  shall  be  re- 
turned and  paid  as  required  by  law. 

DEDUCTIONS    TO    BE    MADE    IN    COMPUTING    NET 
INCOME 

Any  person  subject  to  the  normal  income  tax 
of  1  per  cent,  a  part  of  whose  income  is  withheld 
or  is  to  be  withheld  at  the  source,  who  may 
wish  to  avail  himself  of  the  deductions  author- 
ized in  subsection  B,  section  2,  of  this  act,  may 
file  either  with  the  collector  of  internal  reve- 
nue for  the  district  hi  which  return  is  made  for 
hun,  or  with  the  withholding  agent,  not  less 
than  thirty  days  prior  to  March  1,  a  return  and 
notice  hi  substantially  the  following  form: 

KETUBN  AND  APPLICATION  FOE  DEDUCTIONS 

To 

(name  of  withholding  agent) 

(street  and  number)  (town  or  city) 

(State) 


REGULATIONS  249 

I  hereby  solemnly  declare  that  the  following 
is  a  true  and  correct  return  of  my  gains,  profits 
and  income  from  all  other  sources  for  the  cal- 
endar year  ended  December  31,  191 ..  (from 
March  1  to  December  31  for  the  year  1913) 
and  a  true,  correct  return  of  deductions  asked 
for  under  paragraph  B  of  section  2  of  the  act 
of  October  3,  1913,  and  I  hereby  claim  deduc- 
tions as  shown  below. 

Amount  of  gams,  profits,  interest,  rents, 
royalties,  profits  from  copartnerships  and  in- 
come from  all  other  sources  whatsoever. 


DEDUCTIONS 

1.  The    amount    of   necessary    ex- 
penses actually  paid  hi  carrying  on 
business,  not  including  personal  living 
or  family  expenses 

2.  All  interest  paid  within  the  year 
on  personal  indebtedness  of  tax  payer. 

3.  All  national,  state,  county,  school 
and  municipal  taxes  paid  within  the 
year    (not    including    those    assessed 
against  local  benefits) 

4.  Losses  actually  sustained  during 
the  year,  incurred  in  trade  or  arising 
from  fires,  storms  or  shipwreck  and  not 
compensated  for  by  insurance  or  other- 
wise. . 


250  INCOME   TAX   LAW   EXPLAINED 

5.  Debts  due,  actually  ascertained 
to  be  worthless  and  charged  off  within 
the  year 

6.  Amount  representing  a  reason- 
able   allowance    for    the    exhaustion, 
wear  and  tear  of  property  arising  out 
of  its  use  or  employment  in  the  busi- 
ness, not  in  excess  in  the  case  of  mines 
5  per  cent,  of  the  gross  value  of  the 
output  for  the  year  for  which  the  com- 
putation is  made,  but  not  including 
the  expense  of  restoring  property  or 
making  good  the  exhaustion  thereof 
for  which  an  allowance  is  or  has  been 
made 

7.  The   amount   received   as   divi- 
dends upon  the  stock  or  from  the  net 
earnings  of  any  corporation,  joint  stock 
company,    association    or    insurance 
company  which  is  taxable  upon  its 
net  income 

8.  The  amount  of  income,  the  tax 
upon  which  has  been  paid  or  withheld 
for  payment  at  the  source  of  income. . 


Total  deductions 

(Signed) 

(Address) 


REGULATIONS  251 

Note:  Money  or  other  things  of  value  dis- 
posed of  by  gift,  donation  or  endowment  shall 
not  be  deducted  or  be  made  the  basis  for  a  de- 
duction from  the  income  of  persons  or  corpora- 
tions hi  then*  tax  returns  under  the  income  tax 
law. 

AMOUNT  OF  DEDUCTION  ALLOWABLE  FOR  1913 
ACCORDING  TO  PARAGRAPHS  B  AND  D  OF 
SECTION  2  OF  THIS  ACT 

For  the  present  year  of  1913  (from  March  1 
to  December  31)  the  deductions  allowed  under 
paragraph  B  shall  be  five-sixths  of  the  deduc- 
tions allowable  for  a  calendar  year  as  specified 
in  paragraph  D  of  this  law. 

AMOUNT  OF  TAX  TO  BE  WITHHELD  FOR  1913 
AND  WHEN  WITHHELD 

The  withholding  agent  is  not  required  to 
deduct  and  withhold  prior  to  November,  1, 
1913,  the  normal  tax  of  1  per  cent,  for  which  an 
individual  is  liable. 

Whenever  the  total  amount  of  income  paid 
to  any  person  by  a  withholding  agent  after 
October  31,  1913,  shall  be  in  excess  of  $3,000, 
then  in  that  event  the  withholding  agent  shall 
be  liable  for  and  shall  deduct  and  withhold  the 
tax  on  such  amounts  unless  such  person  shall 


252  INCOME   TAX   LAW   EXPLAINED 

file  a  claim  for  an  exemption  as  allowed  in 
paragraph  D  of  this  act,  the  amount  of  exemp- 
tion allowable  being  $2,500  if  the  annual  exemp- 
tion is  $3,000  or  $3,333.33  if  the  annual  exemp- 
tion is  $4,000,  as  the  case  may  be. 


PERSONS  PHYSICALLY  UNABLE  TO  MAKE  RETURNS 

If  a  person  subject  to  said  tax,  part  of  whose 
income  is  withheld  or  is  to  be  withheld,  is  a 
minor  or  insane  person,  or  is  absent  from  the 
United  States,  or  unable  to  make  the  applica- 
tion or  return  because  of  serious  illness  the  appli- 
cation or  return  may  be  made  by  the  withhold- 
ing agent,  who  shall  make  the  following  oath, 
under  the  penalties  of  this  act: 


FORM  OF  OATH  REQUIRED  OF  A  WITHHOLDING 
AGENT  WHEN  ACTING  FOR  ANOTHER  IN  FIL- 
ING RETURN  AND  MAKING  APPLICATION 
FOR  DEDUCTIONS  ALLOWABLE  UNDER  PARA- 
GRAPH B  AS  PROVIDED  IN  PARAGRAPH  E, 
SECTION  2,  OF  THE  FEDERAL  INCOME  TAX 
LAW  OF  OCTOBER  3,  1913 

I  hereby  swear  (or  affirm)  that  I  have  suffici- 
ent knowledge  of  affairs  and  property  of  (nam- 
ing person  and  address  for  whom  acting)  to  en- 
able me  to  make  full  and  complete  return  for 


REGULATIONS  253 

(naming  persons),  and  that  the  return  of  in- 
come and  application  for  deductions  made  by 
me  are  true  and  accurate. 

(Signed) 

Address  (street  and  number) 

City  and  State 

Date ,  191.. 

Signed  and  sworn  to  before ,  191 . . 

PENALTIES 

Subsection  F  of  section  2  of  the  income  tax 
law  provides,  inter  alia,  as  follows: 

Any  person  or  any  officer  of  any  corporation 
required  by  law  to  make,  render,  sign  or  verify 
and  return,  who  makes  any  false  or  fraudulent 
return  or  statement  with  intent  to  defeat  or 
evade  the  assessment  required  to  be  made, 
shall  be  guilty  of  a  misdemeanor  and  shall  be 
fined  not  exceeding  $2,000  or  be  imprisoned  not 
exceeding  one  year,  or  both,  in  the  discretion 
of  the  court,  with  the  costs  of  prosecution. 

W.  H.  OSBORN, 
Commissioner  of  Internal  Revenue. 

Approved,  October  31,  1913. 
W.  G.  McADOO, 

Secretary  of  the  Treasury. 


INDEX 

A 

ABATEMENT, 

claims  for,  73. 
ABSENTEE, 

provisions  of  old  acts  as  to,  13,  14. 

returns  of ,  59,  60,  86,  191. 
ACCOUNTS, 

of  corporations,  etc,  153. 
ACCUMULATION, 

of  gains  to  avoid  tax,  8,  23,  26,  30. 
ADDITION, 

See  INCREASE. 
ADDITIONAL  TAX, 

See  RETURNS. 

provisions  as  to,  6-9,  67. 

applicability  of  normal  tax  to,  7. 

return  in  case  of,  8. 

what  taxable  income  embraces  for,  8. 

comments  on,  9,  10. 
ADMINISTRATORS, 

deductions  of,  58. 

returns  of,  60,  71. 

duties  of,  as  to  collection  at  source,  83. 
AGENTS, 

deductions  of,  58. 

returns  of,  60. 

duties  of,  as  to  collection  at  source,  83. 
ALASKA, 

included  in  State,  183. 


256  INDEX 

ALIEN, 

provisions  as  to,  13,  14,  28. 
ANNUITY  CONTRACTS, 

payments  on,  not  income,  15. 
APPEAL, 

to  commissioner,  64,  72,  74. 
ASSESSMENT, 

deductions  for,  under  old  law,  44,  47,  48. 

when  to  be  made  and  paid,  80,  82. 

in  case  of  corporations,  129  et  seq.,  173  et  seq. 
ASSESSMENT  INSURANCE, 

provisions  as  to,  123. 
ASSOCIATION, 

accumulations  by,  to  avoid  tax,  8. 

return  by,  when  held  to  be  a  person,  14. 

exemption  of,  under  old  law,  58. 

returns  of,  60,  129  et  seq. 

duties  of,  as  to  collection  at  source,  61,  83. 

class  of,  subject  to  tax,  145  et  seq. 

inventories  and  accounts  of,  153,  154. 

deductions  of,  116  et  seq.,  154  et  seq. 

depreciation  of,  161  et  seq. 

assessments  in  case  of,  173  et  seq. 

refund  of  tax  of,  178  et  seq. 

B 
BANK, 

provisions  as  to,  119. 
BANKER, 

duties  of  as  to  foreign  obligations,  87. 
BEQUEST, 

income  from,  net  income,  15. 

not  to  be  returned,  15,  33. 
BETTERMENTS, 

deductions  for,  36,  54-56. 
BETTING, 

as  a  vocation,  21. 


INDEX  257 

BONDS, 

provisions  as  to  under  old  law,  26. 

interest  on  state,  when  excluded,  37,  38. 

deduction  of  normal  tax  on,  86. 

issued  with  guaranty,  119. 
BOOK  ACCOUNTS, 

as  evidences  of  debt,  32. 
BOOKS  OF  ACCOUNT, 

production  of,  79,  189,  193,  195. 
BROKERS, 

tax  on,  under  old  law,  21. 
BUILDINGS, 

no  deduction  in  case  of  new,  36,  54-56. 
BUSINESS, 

income  from,  15,  18,  21,  22. 

carried  on  by  non-residents,  37. 

principal  place  of,  59,  60,  148. 

C 
COALS, 

depreciation  in,  164  et  seq. 
COLLECTION  AT  THE  SOURCE, 

See  PAYMENT  AT  THE  SOURCE. 
COLLECTOR  OF  INTERNAL  REVENUE, 

returns  to,  59. 

hearing  before,  72. 

when  may  make  returns,  190. 

receipt  of,  198. 
COMMERCE, 

gains  of,  net  income,  15. 
COMMISSIONER  OF  INTERNAL  REVENUE, 

regulations  of,  8. 

corporate  statements  to,  9. 

duties  of,  as  to  returns,  60. 

duties  of,  as  to  copartnerships,  62. 

appeal  to,  64,  72,  et  seq. 


258  INDEX 

COMMISSIONER  OF    INTERNAL    REVENUE— Con- 

tinued. 

duties  of,  as  to  assessments,  80,  81,  173,  et  seq. 
duties  of,  as  to  license,  88,  89. 
rules  and  regulations  of,  8,  90,  186,  et  seq. 
when  to  make  return,  138,  139. 
duties  of,  as  to  refund  of  tax,  179,  180. 

COMPANIES, 

duties  of  as  to  collection  at  source,  61,  83  et  seq. 

COMPROMISE, 

of  tax  cases,  80,  181  et  seq. 
liberal  policy  as  to,  143. 

COMPUTATION, 

of  net  income,  35  et  seq. 
CONGRESSMEN, 

salaries  of,  205. 

CONSERVATORS, 

deductions  of,  58. 
returns  of,  60. 

duties  of,  as  to  collection  at  source,  83. 
CONSTITUTION, 
amendment  to,  5. 

COPARTNERSHIPS, 

duties  of,  as  to  collection  at  source,  61,  83. 
members  of,  liable  individually,  62,  66. 

CORPORATION, 

accumulation  by,  to  avoid  tax,  8. 

deductions  for  dividends  of,  36,  56, 

returns  of,  60,  129. 

duties  of,  as  to  collection  at  source,  61,  83. 

tax  on,  101  et  seq. 

deductions  in  case  of,  116  et  seq.,  154  et  seq. 

computation  and  returns  of,  129  et  seq. 

returns  in  case  of  refusal,  fraud,  etc.,  138,  139. 

class  of,  subject  to  tax,  145  et  seq. 

inventories  and  accounts  of,  153,  154. 


INDEX  259 

CORPORATION  —  Continued. 

depreciation  of,  161  et  seq. 

assessments  in  case  of,  173  et  seq. 

refund  of  tax  of,  178  et  seq. 
COSTS, 

of  suit,  when  deductible  under  old  law,  42. 
COURTS, 

jurisdiction  of,  199. 

D 

DEBTS, 

See  INDEBTEDNESS. 

when  deducted  from  net  income,  36,  49,  52,  53,  206. 
DEDUCTIONS, 

See  EXEMPTIONS. 

in  computing  net  income,  35  et  seq. 

in  case  of  individuals,  57,  63,  205. 

of  normal  tax,  83  et  seq. 

in  case  of  foreign  obligations,  87. 

corporations,  116  et  seq.,  154  et  seq. 
foreign  corporations,  120  et  seq. 
DEEDS  OF  TPUST, 

deduction  of  normal  tax  on,  86. 
DEPRECIATION 

See  WEAR  AND  TEAR. 
DESCENT, 

income  from  property  acquired  by,  15. 
DEVISE, 

income  from,  net  income,  15. 
DISTRICT  OF  COLUMBIA, 

exemptions  as  to,  103,  104. 

included  in  State,  183. 
DIVIDENDS, 

when  net  income,  15,  26-32. 

deductions  in  case  of,  36,  56. 

when  no  return  of,  63. 


260  INDEX 

DOCTORS, 

income  of,  under  old  law,  22,  70. 
deductions  of,  42. 
returns  of,  205,  206. 

E 
EMPLOYEES, 

when  salary  of  excluded,  38. 

duties  of,  as  to  collection  at  source,  83. 
EMPLOYER, 

duties  of,  as  to  collection  at  source,  83. 
ENDOWMENT  CONTRACTS, 

payments  on,  not  income,  15. 
EXCLUSIONS, 

in  computing  net  income,  37,  38. 
EXCISE  TAX, 

of  corporations,  115,  201. 
EXECUTORS, 

deductions  of,  58. 

returns  of,  60,  71. 

duties  of,  as  to  collection  at  source,  83. 
EXEMPTIONS, 

See  DEDUCTIONS. 

of  corporations  from  tax,  102-105,  107-111, 114,  115, 

145  et  seq. 
EXHAUSTION, 

See  WEAR  AND  TEAR. 
EXPENSES, 

when  deducted  from  net  income,  35,  40-45. 

in  case  of  corporations,  116  et  seq.,  154  et  seq. 

F 
FARMERS, 

returns  by,  under  old  law,  34,  35. 

deductions  by,  40-42,  51. 
FOREIGN  CORPORATIONS, 

provisions  as  to,  102,  120  et  seq.,  129  et  seq.,  147,  149. 


INDEX  261 


FOREIGN  OBLIGATIONS, 

deduction  of  tax  on,  87. 
FOREIGN  STEAMSHIP  COMPANIES, 

See  FOREIGN  CORPORATIONS. 
FRAUDULENT  RETURN, 

See  RETURNS. 

G 
GAS, 

depreciation  in,  164  et  seq. 
GIFTS, 

income  from,  net  income,  15,  19,  21. 

losses  incurred  by,  49. 
GOOD-WILL, 

when  not  deductible,  42,  161. 
GUARANTY, 

bonds  issued  with,  119. 
GUARDIANS, 

deductions  of,  58. 

returns  of,  60,  71. 

duties  of,  as  to  collection  at  source,  83. 

H 

HOLDING  COMPANIES, 

provisions  as  to,  8,  125,  161,  206. 

HOTEL  BILLS, 

when  deductible,  42. 

HUSBAND, 

deductions  of,  57,  84,  205,  206. 

I 
IMPROVEMENTS, 

deductions  in  case  of,  36,  54-56. 
INCOME, 

See  NET  INCOME. 
from  business,  18. 


262  INDEX 

INCOME  —  Continued. 
increase  not,  19. 
salaries  as,  20. 
earnings  of  minor  as,  20. 
amount  of,  for  return,  59,  62. 
meaning  of,  127. 

INCOME  TAX, 

See  ADDITIONAL  TAX;  NORMAL  TAX. 
laws  relating  to,  1-4. 

INCREASE, 

in  value  under  old  law,  19,  23-25. 
of  returns  by  collector,  63. 
not  taxable,  205. 

INDEBTEDNESS, 

See  DEBTS. 

corporate  deductions  for,  118,  119. 
INDIVIDUALS, 

See  PERSONS. 
INJUNCTION, 

no  remedy  by,  73. 
INSANE  PERSON, 
return  of,  86. 

INSTRUCTIONS, 

as  to  returns,  142  et  seq. 
INSURANCE, 

proceeds  of  policies  of,  not  income,  15. 

when  deducted  under  old  law,  42. 

provisions  as  to,  123,  127. 

INSURANCE  COMPANIES, 

duties  of  as  to  collection  at  source,  61,  83. 
deductions  in  case  of,  117  et  seq. 
returns  of,  129  et  seq. 
class  of,  subject  to  tax,  145  et  seq. 
inventories  and  accounts  of,  153,  154. 
deductions  of,  116  et  seq.,  154  et  seq. 
depreciation  of,  161  et  seq. 


INDEX  263 


INSURANCE   COMPANIES  —  Continued. 

assessments  in  case  of,  173  et  seq. 

refund  of  tax  of,  178. 
INTEREST, 

when  net  income,  15,  26-30. 

when  deducted  from  net  income,  35,  45,  46. 

deducted  in  case  of  corporations,  118. 
INVALIDITY, 

of  clauses,  etc.,  204. 
INVENTOR, 

income  of,  23. 
INVENTORIES, 

of  corporations,  etc.,  153. 


JOINT    STOCK  COMPANIES, 

accumulation  by,  to  avoid  tax,  8. 

duties  of,  as  to  collection  at  source,  61,  83. 

returns  of,  129  et  seq. 

class  of,  subject  to  tax,  145  et  seq. 

inventories  and  accounts  of,  153,  154.    , 

deductions  of,  116  et  seq.,  154  et  seq. 

depreciation  of,  161  et  seq. 

assessments  in  case  of,  173  et  seq. 

refund  of  tax  of,  178. 
JUDGES, 

salaries  of,  when  excluded,  38. 

L 

LABOR, 

deductions  for,  41. 
LAWS, 

extension  of,  200. 
LAWYERS, 

returns  of,  22,  70,  205,  206, 


264  INDEX 

LEASE, 

when  personal  property,  25. 
LEGACY, 

See  BEQUEST. 
LESSEES, 

duties  of,  as  to  collection  at  source,  83. 
LICENSE, 

in  case  of  foreign  obligations,  88. 
LIEN, 

for  taxes,  113. 
LIFE  INSURANCE, 

See  INSURANCE. 

policies  of,  not  income,  15,  34. 

provisions  as  to,  117  et  seq.t  133  et  seq. 
LIVE  STOCK, 

return  of,  34. 

LOAN  ASSOCIATIONS, 

provisions  as  to,  119. 
LOSSES, 

when  deductible,  35,  49-51. 

in  case  of  corporations,  116. 

M 

MEDICAL  EXPENSES, 

not  deductible,  42. 
MINERALS, 

depreciation  in,  164  et  seq. 
MINES, 

provisions  as  to,  24,  25,  33. 

deductions  in  case  of,  36,  116,  117. 
MINOR, 

earnings  of,  when  income,  20. 

services  of,  when  deductible,  41. 

return  of,  86. 


INDEX  265 

MORTGAGES, 

under  old  law,  29. 

deduction  of  normal  tax  on,  86. 

MORTGAGOR, 

duties  of,  as  to  collection  at  source,  83. 

MUNICIPAL  CORPORATIONS, 
revenues  of,  as  income,  20. 

MUTUAL  FIRE  INSURANCE  COMPANIES, 
provisions  as  to,  117  et  seq.,  133  et  seq. 

MUTUAL  MARINE  INSURANCE  COMPANIES, 
provisions  as  to,  117,  118, 133  et  seq. 

N 
NET  INCOME, 

what  included  in,  14,  15. 

deductions,  in  case  of,  35  et  seq,  57. 

computation  of  tax  on,  58. 

of  corporation,  tax  on,  101. 

of  domestic  and  foreign  corporations,  116  et  seq. 

meaning  of,  127. 

computation  of,  129  et  seq. 

NORMAL  TAX, 

provisions  as  to,  5,  6. 

comments  on,  9-12. 

computing  net  income  as  to,  35  et  seq. 

collection  of,  at  source,  61  et  seq.t  83  et  seq. 

when  no  returns  as  to,  63. 

upon  corporations,  101  et  seq. 

NOTICE, 

claiming  exemptions,  84. 
in  case  of  corporations,  129. 

O 

OBLIGATIONS, 

deduction  of  normal  tax  on,  8ft. 


266  INDEX 

OFFICERS, 

of  State,  when  salary  excluded,  38. 
duties  of,  as  to  collection  at  source,  83. 

OILS, 

depreciation  in,  164  et  seq. 

ORES, 

depreciation  in,  164  et  seq. 

P 

PARTNERSHIP, 

See  COPARTNERSHIPS. 
PATENT, 

income  from,  23. 
PAYMENT  AT  THE  SOURCE, 

deductions  in  case  of,  37. 

method  of,  61  et  seq. 

of  normal  tax,  83  et  seq. 

rules  and  regulations  as  to,  207-253. 

PENALTIES, 

under  old  law,  45. 

for  false  statements,  85,  191. 

not  obtaining  license,  89. 

not  making  or  for  fraudulent  return,  97-100,  138, 139, 

174,  183,  184,  191. 
imposed  on  revenue  officers,  184  et  seq. 
prosecution  of,  204. 

PENSIONS, 

return  of,  33. 

PERSONS, 

duties  of,  as  to  collection  at  source,  61,  83  et  seq. 
deductions  in  case  of,  57,  84,  205,  206. 

PETROLEUM, 

depreciation  in,  164  et  seq. 

PHILIPPINE  ISLANDS, 
exemptions  as  to,  104. 


INDEX  267 


PHILIPPINE   ISLANDS  —  Continued. 

included  in  state,  183. 

extension  of  law  to,  200. 
PHYSICIANS, 

See  DOCTORS. 
PORTO  RICO, 

exemptions  as  to,  104,  149. 

included  in  State,  183. 

extension  of  law  to,  200. 

PRESIDENT, 

salary  of,  38. 

inspection  of  returns  by,  173. 
PRINCIPAL  BUSINESS, 

in  case  of  returns,  59,  60,  148. 
PRODUCE, 

returns  as  to,  34,  35. 

PRODUCTION, 
of  books,  79. 

PROFESSION, 

compensation  from,  net  income,  15. 
PROMISSORY  NOTES, 

provisions  as  to,  28,  29,  32. 
PROTEST, 

in  payment  of  taxes,  75  et  seq. 
PUBLICITY, 

provisions  as  to,  164,  173,  184  et  seq. 
PUBLIC  UTILITY, 

when  exempt,  103,  104. 

R 
REAL  ESTATE, 

dealings  in,  15,  22-26,  50. 
RECEIPT, 

of  collector,  198. 


268  INDEX 

RECEIVERS, 

deductions  of,  58. 

returns  of,  60. 

duties  of,  as  to  collection  at  source,  83. 

REFUND, 
of  tax,  178. 

REGULATIONS, 

See  RULES  AND  REGULATIONS. 

REMEDIES, 

provisions  as  to,  72-80. 

in  case  of  corporations,  110  et  seq. 

RENT, 

when  net  income,  15,  31,  32. 
deduction  for,  40,  43,  44. 

REPAIRS, 

provisions  as  to,  36,  48,  53-56. 

RESIDENCE, 

provisions  as  to,  13,  14. 

RETURNS, 

provisions  as  to,  8,  58-72,  186. 
under  old  acts,  13,  14,  21-34. 
when  no  deduction  in,  37. 
when  not  to  be  made,  63. 
under  old  acts,  68. 
in  case  of  corporations,  129  et  seq. 
instructions  as  to,  142  et  seq. 
inspection  of,  173. 
by  collector,  190. 

REVENUE  LAWS, 
how  construed,  1, 

RULES  AND  REGULATIONS,- 
as  to  returns,  8,  90,  173,  186  et  seq. 
as  to  collection  at  source,  207-253. 


INDEX  269 

s 


SALARY, 

included  in  net  income,  15,  20. 

of  present  president,  38. 

of  judges,  38. 

when  deducted  under  old  law,  41. 

of  congressman,  205. 
SCRIP  DIVIDENDS, 

under  old  law,  29. 

SECRETARY  OF  THE  TREASURY, 
See  RULES  AND  REGULATIONS. 

approval  of  rules  by,  8. 

duties  of,  as  to  accumulations,  9. 
returns,  60,  173. 
licenses,  89,  90. 
SECURITIES, 

interest  of,  net  income,  15. 
SERVICES, 

included  in  net  income,  15. 
SHIPS, 

earnings  of,  31. 

deductions  in  case  of  losses  on,  51. 

returns  of  masters  of,  72. 
SICKNESS, 

returns  in  case  of,  86,  191. 
STATE, 

meaning  of,  183. 
STOCKHOLDERS, 

profits  of,  32. 

assessments  of,  44,  48. 

dividends  of,  49. 

losses  of,  50,  51. 
STORE  BILLS, 

not  deductible,  42. 
SUIT, 

when  to  be  brought,  74-80. 

in  case  of  corporations,  110  et  seq. 


270  INDEX 

SURETY, 

losses  in  case  of,  50,  52. 

T 
TAXATION, 

canvass  for  objects  of,  186. 
TAXES, 

return  of,  27. 

when  deducted,  35, 46-49. 

computation  of,  58  et  seq. 

in  case  of  corporations,  101  et  seq.,  129. 

lien  for,  113. 

refund  of,  178,-180. 

receipt  for,  198. 
TERRITORY, 

included  in  State,  183. 
TIMBER, 

provisions  as  to,  24, 25. 
TORT  DAMAGES, 

when  not  income,  21. 

deductions  in  case  of,  51. 
TRADE, 

gains  of,  net  income,  15. 
TRAVELING  EXPENSES, 

when  deductible,  42. 
TRUST  COMPANY, 

provisions  as  to,  119. 
TRUSTEES, 

for  aliens,  13. 

deductions  of,  58. 

returns  of,  60. 

duties  of,  as  to  collecting  at  source,  83. 

U 

UNITED  STATES, 
meaning  of,  183. 
jurisdiction  of  districts  courts  of,  199. 


INDEX  271 

UNITED  STATES  BONDS, 
interest  on,  28,  37,  38. 

V 
VOCATION, 

compensation  from,  net  income,  15. 
betting  as,  21. 

W 
WAGES, 

included  in  net  income,  15. 
WEAR  AND  TEAR, 

when  deducted,  36,  54,-56. 

in  case  of  corporations,  116  et  seq.,  161  et  aeq. 
WELLS, 

expense  of,  43. 
WIFE, 

deductions  of,  57,  84,  205,  206. 


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